One Way to Enhance the Stability of the Banking System

question 33

Multiple Choice

One way to enhance the stability of the banking system is to:

• A) Require higher bank capitalization or net worth
• B) Increase the federal funds rate
• C) Reduce the required-reserve ratio
• D) Require more leveraging by banks

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Definitions:

Substitution Effect

The economic concept that as prices rise (or incomes decrease), consumers will replace more expensive items with cheaper alternatives, holding utility constant.

Relative Price

Relative price is the price of one good or service compared to another, essentially indicating the trade-off between choosing one over the other.

Price Increases

Price Increases involve a rise in the cost of goods or services over time, often measured by inflation rates.

Demand Decreases

A situation where the quantity of goods and services that consumers are willing and able to purchase at a given price level declines.