ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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banks’ required reserves increase and their excess reserves decrease.
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bank customers become more willing to make deposits in banks.
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banks are able to make more loans.
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banks’ required reserves decrease and their excess reserves increase.
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Detailed explanation-1: -Conversely, the Fed increases the reserve ratio requirement to reduce the amount of funds banks have to lend. The Fed uses this mechanism to reduce the supply of money in the economy and control inflation by slowing the economy down.
Detailed explanation-2: -Increasing the (reserve requirement) ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit.
Detailed explanation-3: -A decrease in the reserve ratio will increase the size of the monetary multiplier and increase the excess reserves held by commercial banks, thus causing the money supply to increase. 8.
Detailed explanation-4: -By raising the IOER rate, the central bank gives commercial banks more incentives to hold excess reserves, which reduces the money supply. To conduct an expansionary monetary policy, the central bank can lower the IOER rate. This will lead to commercial banks reducing their excess reserves.