Banca Solida has, in the past, always operated with a reserve ratio of 25 per cent. It has now been taken over by Gung-Ho Bank which operates with a reserve ratio of 12 per cent. Assuming that Banca Solida adopts the business practices of its new owner, what will be the effect on money supply in the country in which Banca Solida operates?
a. Money supply will increase because Banca Solida will increase its loans.
b. The effect on money supply cannot be determined from the information given.
c. Money supply will decrease because the loans will have to be repaid.
d. Money supply will be unchanged because the central bank has made no policy changes.
Answer: a. Money supply will increase because Banca Solida will increase its loans.
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