ECONOMICS (CBSE/UGC NET)

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: -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-3: -Raising the reserve requirement reduces the amount of money that banks have available to lend. Since the supply of money is lower, banks can charge more to lend it. That sends interest rates up.

Detailed explanation-4: -An increase in reserve requirements means that banks must hold more reserves and therefore loan less. As a result an increase in the reserve requirements raises the reserve ratio, lowers the money multiplier, and decreases the money supply.

Detailed explanation-5: -By increasing the reserve requirement, the Federal Reserve is essentially taking money out of the money supply and increasing the cost of credit. Lowering the reserve requirement pumps money into the economy by giving banks excess reserves, which promotes the expansion of bank credit and lowers rates.