China’s GDP Growth Set to Dip, Raising Pressure for More Stimulus

Answer the following questions to check your understanding of the story.

1) What is the required reserve ratio?

a) The maximum percentage of deposits that banks can lend out to consumers and firms.

b) The minimum percentage of deposits that depository institutions are required to hold as reserves.

c) The minimum percentage of liquid assets that depository institutions are required to hold as reserves.

d) The percentage of deposits that depository institutions plan to hold as reserves.

2) What is the immediate effect of lowering the required reserve ratio on total reserves in the banking system?

a) Total reserves increase because new reserves are created by the central bank.

b) Total reserves decrease—required reserves decrease by more than the increase in excess reserves.

c) Total reserves remain unchanged—excess reserves decrease and required reserves increase by an equal amount.

d) Total reserves remain unchanged—excess reserves increase and required reserves decrease by an equal amount.

3) What is the effect of decreasing the required reserve ratio on the quantity of money?

a) The quantity of money decreases.

b) The quantity of money increases.

c) The quantity of money doesn’t change.

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