ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -When the Fed adjusts the reserve requirement, it allows banks to charge lower interest rates. Banks often take on a financial burden when limits change, so the Fed often uses open market operations instead to influence banks.

Detailed explanation-3: -Open-market operations refer to the Fed’s buying and selling of government bonds. 1) then bank reserves go up by the value of the securities sold to the Fed. 3) When Fed buys bonds from bankers, reserves rise and excess reserves rise by same amount since no checkable deposit was created.

Detailed explanation-4: -The Fed creates new reserves and new money when it purchases bonds. It destroys reserves and thus reduces the money supply when it sells bonds.