ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the Fed were to lower the reserve requirement, banks would be allowed to hold a smaller amount in reserves, and they will have a greater amount of money available to lend out, increasing the availability of credit.

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: -As of 2008, the Federal Reserve pays banks an interest rate on these excess reserves. The interest rate on excess reserves is now being used in coordination with the fed funds rate to encourage bank behavior that supports the Federal Reserve’s targets.

Detailed explanation-4: -Reserve Requirement Changes Affect the Money Stock Decreasing the ratios leaves depositories initially with excess reserves, which can induce an expansion of bank credit and deposit levels and a decline in interest rates.

Detailed explanation-5: -How does the lower interest rate affect me? A: The Federal Reserve sets a key interest rate, called the federal funds rate, which is the rate banks charge to each other for very short-term loans. The Federal Reserve lowered the target range for the federal funds rate to 0 to 1/4 percent.