Part 1 - Question 1 · Introducció a la Macroeconomia UPF 2018

Examine the rationale for lowering the reserve requirement imposed on commercial banks and outline the expected macroeconomic effects that policymakers aim to achieve through this measure.

Solución: When the central bank lowers the reserve requirement ratio, commercial banking institutions are obliged to hold a smaller share of their deposits in the form of reserves, enabling them to expand lending to households and corporations. This drop in the reserve ratio magnifies the money multiplier and leads to an expansion of the aggregate money supply. As bank credit becomes more abundant and accessible, firms—particularly small and medium-sized enterprises (SMEs)—can secure financing for new capital investments. Consequently, aggregate demand, production, employment, and personal income rise, stimulating private consumption and driving short-run economic expansion.