Asked by Bianca Benincasa on Apr 29, 2024
Verified
If the Fed lowers the reserve requirements for banks,this would
A) cause a decrease in the money supply.
B) cause an increase in the money supply.
C) raise the size of the deposit expansion multiplier.
D) improve the safety of banks but have no effect on the deposit expansion multiplier or the money supply.
Reserve Requirements
Regulations set by central banks determining the minimum amount of reserves that banks must hold against deposits, influencing the bank's ability to lend.
Money Supply
The total amount of monetary assets available in an economy at any specific time, including cash, bank deposits, and other liquid assets.
Deposit Expansion Multiplier
A ratio that explains the total increase in deposits within the banking system generated from an initial deposit, based on the reserve requirement ratio.
- Recognize the role and aids the Federal Reserve deploys in the orchestration of monetary policy.
- Understand the impact of Federal Reserve's policies on inflation, interest rates, and the money supply.
Verified Answer
ED
Emily DammeyerMay 01, 2024
Final Answer :
B
Explanation :
Lowering the reserve requirements for banks means that banks would be required to hold fewer reserves against their deposits. This would increase the excess reserves that banks have available to lend out, leading to an increase in the money supply through the deposit expansion multiplier. Hence, choice B is the best answer.
Learning Objectives
- Recognize the role and aids the Federal Reserve deploys in the orchestration of monetary policy.
- Understand the impact of Federal Reserve's policies on inflation, interest rates, and the money supply.