ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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increase the amount the bank can loan
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decrease the amount the bank can loan
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not change the amount the bank can loan
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decrease the money multiplier and increased the potential growth in the money supply
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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: -By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy. Conversely, by raising the banks’ reserve requirements, the Fed is able to decrease the size of the money supply.
Detailed explanation-3: -When the Fed increases the reserve requirement then it means the Fed is using a contractionary monetary policy to regulate the economy. So, an increase in reserve requirement will make the banks lend less that in turn reduces the level of money supply in the economy.
Detailed explanation-4: -If the required reserve ratio is 10 percent this means that banks must hold 10 percent of their deposits as required reserves. If deposits are $20 million, then $2 million ($20 million x . 10) must be held as required reserves.