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JAMB Economics 1994 Question 36

Question 36

Money and Inflation

An increase in both the legal reserve ratio and discount rate has the effect of

  1. A.increasing the quantity of money in circulation
  2. B.decreasing the quantity of money in circulation
  3. C.increasing the value of money
  4. D.decreasing the value of money
Show the answer and explanation

Answer: B (decreasing the quantity of money in circulation)

Explanation

Banks must keep more reserves and borrowing from the Central Bank costs more, so they lend less and money supply falls.