ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -When the Fed adjusts the reserve requirement, it allows banks to charge lower interest rates. Banks often take on a financial burden when limits change, so the Fed often uses open market operations instead to influence banks.

Detailed explanation-3: -A lower reserve ratio requirement gives banks more money to lend, at lower interest rates, which makes borrowing more attractive to customers. Conversely, the Fed increases the reserve ratio requirement to reduce the amount of funds banks have to lend.

Detailed explanation-4: -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-5: -If the Fed wants to decrease the money supply, it can sell bonds, thereby reducing the reserves of the member banks that buy them. Because these banks would then have less money to lend, the money supply would decrease.