Reserve ratio and money supply have ________ relationship.
Show answer & explanation
Correct answer: A
Explanation
The correct answer is option 1 i.e. an inverse.
The reserve ratio and money supply have an inverse relationship. The reserve ratio is the fraction of deposits that banks are required to hold in reserve and not lend out. When the reserve ratio is high, banks hold a larger portion of deposits as reserves, leading to a decrease in the money supply because less money is available for lending. Conversely, a lower reserve ratio allows banks to lend more, increasing the money supply.