ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -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: -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-4: -The Federal Reserve uses open-market operations to either increase or decrease reserves. To increase reserves, the Federal Reserve buys U.S. Treasury securities by writing a check drawn on itself. The seller of the treasury security deposits the check in a bank, increasing the seller’s deposit.