Banca Solida has traditionally maintained a reserve ratio of 25%. After being acquired by Gung-Ho Bank, which uses a reserve ratio of 12.5%, what impact will adopting Gung-Ho Bank's reserve practices have on the money supply in Banca Solida's country?

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The money supply will grow because Banca Solida will extend more loans.It is impossible to determine the effect on the money supply with the information provided.The money supply will shrink as loans are repaid.The money supply will stay the same since the central bank's policies remain unchanged.There will be no change because the reserve ratio does not affect lending.

Explanation

When Banca Solida lowers its reserve ratio from 25% to 12.5%, it can lend out a larger portion of its deposits. This increase in lending expands the money supply in the economy. Therefore, adopting Gung-Ho Bank's reserve ratio will lead to a rise in the money supply.