ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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This would increase the amount the bank can loan.
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It would decrease the amount each bank would be able to loan.
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Have little to no impact on the amount the bank can loan
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Impacts only small commercial banks within the banking system.
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Detailed explanation-1: -A reduction in the required reserve ratio from 20% to 10% is an expansionary monetary policy because it implies that the banks are required to keep a lower proportion of the total deposits in the form of reserves, freeing up money to be given out as loans for credit creation.
Detailed explanation-2: -If the Fed sells $10 million in bonds to a bank, and the required reserve ratio is 20 percent, then the banking system can: decrease the money supply by up to $50 million.
Detailed explanation-3: -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-4: -When the reserve requirement ratio is raised, the money multiplier decreases, and the amount of excess reserves decreases in the banking system . Explanation: The money held by the bank that cannot be lent is the reserves to be kept as per the reserve requirement ratio prescribed by the central bank.