ECONOMICS
MONEY
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
Open Market Operations
|
|
|
Required Reserve Rate Changes
|
|
|
Discount Rate Changes
|
|
|
Interest Rate Paid on Reserves
|
Detailed explanation-1: -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-2: -If banks have a higher reserve requirement, there will be less money available to lend to consumers and businesses. However, this money will then provide the banks with a level of protection against possible bank failure should there be an economic downturn or a run on the bank.
Detailed explanation-3: -The reserve ratio is the amount of reserves-or cash deposits-that a bank must hold on to and not lend out. The greater the reserve requirement, the less money that a bank can potentially lend-but this excess cash also staves off a banking failure and shores up its balance sheet.
Detailed explanation-4: -Depository institutions normally keep a certain level of vault cash on hand to meet the operating needs of their offices and branches. Required reserves above the amount of vault cash are met by holding reserve balances with Federal Reserve Banks.