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.

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: -Fed rate cuts are designed to lower interest rates throughout the economy and make it cheaper to borrow money. As a result, newly issued debt securities offer lower interest rates to holders while existing debt that carries higher interest rates may trade at a premium-that is, prices in the secondary market may rise.

Detailed explanation-4: -The Effect of Interest Rates on Aggregate Demand If interest rates decline, there will be an opposite effect. Individuals and businesses want to borrow more money at lower interest rates and invest this money in capital and consumer purchases. Therefore aggregate demand will increase.

Detailed explanation-5: -The Fed raises interest rates to slow the amount of money circulating through the economy and drive down aggregate demand. With higher interest rates, there will be lower demand for goods and services, and the prices for those goods and services should fall.