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: -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.

Detailed explanation-3: -Reserve Requirement Changes Affect the Money Stock 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-4: -A decrease in the reserve ratio will increase the size of the monetary multiplier and increase the excess reserves held by commercial banks, thus causing the money supply to increase.

Detailed explanation-5: -An increase in reserve requirements raises the effective tax rate on deposit services and, hence, lowers the amount of financial intermediation carried out by banks.