ECONOMICS
MONEY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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More is lent out and more is paid in interest
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More is lent out and less is paid back in interest
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Less is lent out and more is paid in interest
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Less is lent out and less is lent in interest.
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Detailed explanation-1: -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: -When the Fed increases the reserve requirement then it means the Fed is using a contractionary monetary policy to regulate the economy. So, an increase in reserve requirement will make the banks lend less that in turn reduces the level of money supply in the economy.
Detailed explanation-3: -If the Fed increases the interest rate of reserves, banks will want to keep higher reserves. This will reduce the money multiplier as higher reserves effectively mean a higher reserve ratio. A fall in the money multiplier will reduce the loans given out by banks, reducing the money supply.
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. 8.