ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Expansionary Monetary Policy: An increase the money supply and a reduction in interest rates results when the Fed lowers reserve requirements. This is the recommended monetary policy to counter a recession, to stimulate the economy, and to reduce the unemployment rate.

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: -An increase in reserve requirements raises the effective tax rate on deposit services and, hence, lowers the amount of financial intermediation carried out by banks.

Detailed explanation-4: -If the Fed wants to increase the money supply, it needs to get banks to lend more. The Fed can do one of three things to encourage banks to lend more. It can lower reserve requirements. It can lower the discount rate.

Detailed explanation-5: -By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy. Conversely, by raising the banks’ reserve requirements, the Fed is able to decrease the size of the money supply.