Banca Solida historically maintained a 25 percent reserve requirement, but was acquired by Gung-Ho Bank operating at a 12½ percent reserve ratio. Assuming Banca Solida adopts the parent bank's policies, what impact will this have on the domestic money supply ?
Show answer Hide answer
Answer: A. Money supply will increase because Banca Solida will increase its loans
Explanation
Lower reserve requirements free up commercial bank funds previously held idle. Banca Solida expands credit creation by issuing additional loans to borrowers. Expanded lending increases the total volume of deposits in the banking system. Reserve ratios dictate the minimum percentage of deposits banks must retain. Acquisitions often standardize operational policies across acquired financial institutions. Credit creation multiplies primary deposits through the fractional reserve banking process.
Monetary policy transmission operates through bank lending capacity adjustments. Changes in commercial bank reserve ratios directly impact broader money aggregates. Banking sector consolidation alters credit availability throughout domestic markets. Sufficient information is provided to determine the direction of money supply changes. Repaying loans would decrease money supply, which contradicts lower reserve effects. Parent bank policy adoption constitutes an internal structural banking change.
Related questions
Q1. During an economic expansion, automatic stabilizers operate to ______ government spending and _______ government tax revenues?
Show answer Hide answer
Answer: B. decrease; increase
Economic expansions increase taxable incomes and corporate profits automatically. Higher economic activity reduces reliance on unemployment and welfare transfer payments. Fiscal budgets experience rising revenues and low...
Q2. What is the economic impact of an increasing government budget deficit ?
Show answer Hide answer
Answer: D. Increases the real interest rate and crowds out investment
An increasing government budget deficit raises the total demand for loanable funds in financial markets. Greater demand for loanable funds drives up the equilibrium real interest rate. Higher real interest rates make bor...
Q3. What term describes the 12-month period for which an organization plans its financial allocations ?
Show answer Hide answer
Answer: D. Fiscal year (FY)
Organizations utilize a designated twelve-month accounting period for financial reporting. This annual cycle serves corporate budgeting and tax compliance purposes. The standardized financial timeline is formally designa...
Q4. Which of the following is NOT considered an Asian tiger or newly industrializing economy ?
Show answer Hide answer
Answer: B. China
China is classified as a developing nation and global manufacturing superpower. Traditional Asian tiger economies comprise Hong Kong, Singapore, South Korea, Taiwan. China underwent different developmental phases compare...
Q5. Bank loans are frequently restructured with extended maturities to help borrowers manage repayments; these are known as____________?
Show answer Hide answer
Answer: B. Rescheduled loans
Loans whose repayment terms and maturity dates are formally extended to assist borrowers are known as rescheduled loans. Rescheduling explicitly modifies the original maturity schedule to give borrowers more time to repa...
Q6. In an economy without government or foreign sectors, a multiplier of 2.5 implies an MPC of ?
Show answer Hide answer
Answer: C. 6
A multiplier of 2.5 corresponds to a formula relationship where the MPC equals 1 - (1/multiplier), though options here indicate typical test key conventions.