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JAMB Economics 1978 Question 23

Question 23

Financial Institutions

An increase in liquid reserve requirements by the Central Bank of Nigeria will result in

  1. A.a reduction in commercial banks' excess reserves
  2. B.more commercial bank loans to members of the public
  3. C.an increase in commercial banks' excess reserves
  4. D.no change in commercial banks' excess reserves
  5. E.a reduction in Central Bank's gold reserves.
Show the answer and explanation

Answer: A (a reduction in commercial banks' excess reserves)

Explanation

If banks must keep a larger share of deposits as reserves, less is left over as excess reserves for lending.