Suppose the reserve requirement is 10%. a. If the Federal Reserve decreases the

Question

Suppose the reserve requirement is 10%.

a. If the Federal Reserve decreases the reserve requirement, banks can lend out:

fewer reserves, thus decreasing the money multiplier and decreasing the money supply.

more reserves, thus increasing the money multiplier and increasing the money supply.

fewer reserves, thus increasing the money multiplier and increasing the money supply.

more reserves, thus decreasing the money multiplier and decreasing the money supply.

b. The Federal Reserve:

rarely changes the reserve requirement and does not use the reserve requirement as a major monetary policy tool.

needs permission from the president before making changes to the reserve requirement.

does not have the ability to change the reserve requirement since banks determine the amount of reserves to lend.

changes the reserve requirement frequently in order to make adjustments to the money supply.

Explanation / Answer

a) see reserve requirement means some percentage of demand and time deposits banks have to keep with federal reseve. this money banks can't lend out which they otherwise love to do so. when the reserve requirement is reduced means more money is available with the banks to lend out and they will lend out more and due to which money multiplier is increased ultimately increasing the money supply.

so option 2 is correct.

b) federal reserve uses reserve ratio , liquidity ratio. repo rate , reverse reo rate to control money supply and inflation in the country.

so here LAST option is correct

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