What happens when a bank is required to hold more money in reserve?

it has less money for loans.
it has less money for operations.
it has less money for interest payments.
it has less money for withdrawals.

The correct answer is: "It has less money for loans.".

When the central banks decides to increase the coefficient of reserves, commercial banks have to keep a higher percentage of the deposits of their customers in cash. The rest will be lent to third parties and therefore fiat money is created under this system.

The coefficient of reserves is an instrument of the monetary policy because it can be used to control the money supply (money in circulation in the economy) by the monetary authorities. The higher the coefficient, the less money that can be lent by banks and the lower the growth rate of the money supply.

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