ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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This allows more money to be available for loans, raising the interest rate & contributing to inflation
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money available for loans declines, this is an effective tool to tighten the money supply
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These monies are funneled to pay off the national debt but we haven’t been doing this for several years
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By raising the reserve requirement the government is able to lower taxes.
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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: -The Federal Reserve sets borrowing costs for shorter-term loans in the U.S. by changing its federal funds rate. The rate governs how much banks pay each other in interest to borrow funds from their reserves kept at the Fed on an overnight basis.
Detailed explanation-4: -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. Changing the requirement is expensive for banks.
Detailed explanation-5: -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.