ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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it raises the reserve requirement, thereby increasing the money supply
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it lowers the requirement, thereby decreasing the money supply
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it raises the reserve requirement, thereby decreasing the money supply
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it lowers the reserve requirement, thereby increasing the money supply.
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Detailed explanation-1: -With a tight money policy, the Federal Reserve sells bonds, raises the reserve ratio, or raises the discount rate. As a consequence of these actions, excess reserves decrease, which in turn decreases the money supply. When this happens, interest rates rise, investment spending decreases and aggregate demand decreases.
Detailed explanation-2: -In a tightening monetary policy environment, a reduction in the money supply is a factor that can significantly help to slow or keep the domestic currency from inflation. The Fed often looks at tightening monetary policy during times of strong economic growth.
Detailed explanation-3: -Key Takeaways The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. Conversely, by raising the banks’ reserve requirements, the Fed can decrease the size of the money supply.
Detailed explanation-4: -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.