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JAMB Economics 2009 Question 28

Question 28

Financial Institutions

The ability of commercial banks to create money depends on the

  1. A.reserve ratio
  2. B.liquidity ratio
  3. C.interest rate
  4. D.capital base
Show the answer and explanation

Answer: A (reserve ratio)

Explanation

Banks lend out deposits beyond the required reserve; the lower the reserve ratio, the more money they can create (multiplier = 1/reserve ratio).