ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A lower reserve requirement means the Federal Reserve is pursuing an expansionary monetary policy. The lower reserve requirement means banks do not need to keep as much cash on hand. This gives them more money for consumer and business loans.

Detailed explanation-2: -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-3: -This so-called quantitative easing increases the size of the central bank’s balance sheet and injects new cash into the economy. Banks get additional reserves (the deposits they maintain at the central bank) and the money supply grows.

Detailed explanation-4: -If all banks loan out their excess reserves, the money supply will expand. In a multi-bank system, institutions determine the amount of money that the system can create by using the money multiplier.

Detailed explanation-5: -The formulas for calculating changes in the money supply are as follows. Firstly, Money Multiplier = 1 / Reserve Ratio. Finally, to calculate the maximum change in the money supply, use the formula Change in Money Supply = Change in Reserves * Money Multiplier.