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: -Raising the reserve requirement reduces the amount of money that banks have available to lend. Since the supply of money is lower, banks can charge more to lend it. That sends interest rates up.

Detailed explanation-3: -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-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: -Financial institutions are required to hold a minimum amount of reserves to ensure sufficient liquidity when clients want to withdraw cash under normal circumstances.