ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The amount of federal taxes people owe would decrease.
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The amount of federal taxes people owe would increase.
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The amount of money circulating in the economy would decrease.
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The amount of money circulating in the economy would increase.
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Detailed explanation-1: -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-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: -What would be the effect of increasing the reserve requirements of banks on the money supply? It would decrease the banks money supply because banks would earn less interest, and their share prices could fall.
Detailed explanation-4: -A larger money supply lowers market interest rates, making it less expensive for consumers to borrow. Conversely, smaller money supplies tend to raise market interest rates, making it pricier for consumers to take out a loan.
Detailed explanation-5: -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.