ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. Conversely, by raising the banks’ reserve requirements, the Fed can 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: -What is the impact on the money supply when the Federal Reserve increases reserve requirements? An increase in reserve requirements forces banks to hold more reserves, increasing the reserve-deposit ratio, thus reducing the money multiplier.

Detailed explanation-4: -If the Fed raises the reserve requirement, banks can lend out less of each dollar that is deposited. The higher reserve ratio reduces the money multiplier, thereby decreasing the money supply.