Consider a Policy That Decreases the Required Reserve Ratio in a Country

question 35

Multiple Choice

Consider a policy that decreases the required reserve ratio in a country such as the United States.What type of policy is this?  

• A) It is a contractionary policy because it lowers the amount of total reserves in the banking system. 
• B) It is a contractionary policy because it lowers the amount of excess reserves in the banking system. 
• C) It is an expansionary policy because it raises the amount of total reserves in the banking system. 
• D) It is an expansionary policy because it raises the amount of excess reserves in the banking system.

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Definitions:

Exchange Rate Arbitrage

A strategy involving the simultaneous purchase and sale of a currency to exploit differences in its price in different markets, aiming for a risk-free profit.

Currency Swap

A financial agreement between two parties to exchange principal and/or interest payments of a loan in one currency for equivalent amounts in another currency.

Fixed Interval

A specified period of time between events or actions, used in scheduling and monitoring activities.

Uncovered Interest Parity

An economic theory suggesting that the difference in interest rates between two countries will equal the expected change in exchange rates between their currencies.