ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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If the federal reserve increases interest rates and reserve requirements, what would be the most likely effect of that decision?
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The stock market will crash
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Unemployment will rise
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Unemployment will fall
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Inflation will rise
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Explanation:
Detailed explanation-1: -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-2: -This key interest rate impacts how much commercial banks charge each other for short-term loans. A higher fed funds rate means more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money.
Detailed explanation-3: -An increase in reserve requirements raises the effective tax rate on deposit services and, hence, lowers the amount of financial intermediation carried out by banks.
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