A Decrease in the Reserve Requirement

question 127

Multiple Choice

A decrease in the reserve requirement

• A) increases the money supply, which leads to increased interest rates and a fall in investment spending.
• B) increases the money supply, which leads to decreased interest rates and a rise in investment spending.
• C) decreases the money supply, which leads to increased interest rates and a fall in investment spending.
• D) decreases the money supply, which leads to decreased interest rates and a rise in investment spending.

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Definitions:

Marginal Productivity Theory

An economic theory suggesting that the addition of a unit of labor or capital within the production process will increase the output by the amount of the marginal product.

MP L

Marginal Product of Labor; the additional output resulting from employing one more unit of labor, holding other inputs constant.

MP C

Marginal Propensity to Consume, which is the fraction of additional income that a household spends on consumption.

Production Costs

Expenses associated with the creation of a product or service, including raw materials, labor, and overhead costs.