If the Fed decreases the required reserve ratio at a time when banks are holding no excess reserves,the Fed is:

A) forcing banks to increase the money supply.
B) forcing banks to decrease the money supply.
C) making it possible for banks to increase the money supply but not forcing them to do so.
D) making it possible for banks to decrease the money supply but not forcing them to do so.
E) conducting open market operations but not changing the money supply.

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kimberly liope · Accepted Answer

Final Answer : C, Explanation :  If the Fed decreases the required reserve ratio when banks are holding no excess reserves, it means that banks now have more money available to lend out. However, the banks are not forced to lend out the extra funds. They may choose to keep the funds as excess reserves, or they may choose to lend out the funds and increase the money supply. Therefore, the Fed is making it possible for banks to increase the money supply, but not forcing them to do so.

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