ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The reserve requirement is another tool that the Fed has at its disposal to control liquidity in the financial system. By reducing the reserve requirement, the Fed is executing an expansionary monetary policy, and conversely, when it raises the requirement, it’s exercising a contractionary monetary policy.

Detailed explanation-2: -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-3: -Monetary policy in the United States comprises the Federal Reserve’s actions and communications to promote maximum employment, stable prices, and moderate long-term interest rates–the economic goals the Congress has instructed the Federal Reserve to pursue.

Detailed explanation-4: -Changes to monetary policy affect interest rates in the economy. Changes to interest rates affect economic activity and inflation.