ECONOMICS
FEDERAL RESERVE
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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easy money
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open market
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tight money
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fiscal policy
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Detailed explanation-1: -When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation’s money supply and expands the economy.
Detailed explanation-2: -If the Federal Reserve, or Fed, decreases the reserve requirement, banks can loan out a higher amount of their deposits. If they do that, the excess deposits will increase because banks now don’t have to hold as much, but they may not do so voluntarily. Because of the additional loans, the money supply increases.
Detailed explanation-3: -In easy money policy, the interest rates are lower, therefore it is easier to borrow, thereby increasing money circulation in the economy. In the tight money policy, the interest rates are higher, therefore it is difficult to borrow and the money circulation will reduce in the economy.
Detailed explanation-4: -This so-called quantitative easing increases the size of the central bank’s balance sheet and injects new cash into the economy. Banks get additional reserves (the deposits they maintain at the central bank) and the money supply grows.