If the Fed were to decrease the reserve requirement, what would occur?

A. Prices would likely fall.
B. Banks would be required to increase the amount of money they physically keep in their vaults.
C. There would be more money available for banks to loan to customers.
D. The economy would stabilize and fall to zero inflation.

Question

29-07-2024
Business

Answered

If the Fed were to decrease the reserve requirement, what would occur?

A. Prices would likely fall.
B. Banks would be required to increase the amount of money they physically keep in their vaults.
C. There would be more money available for banks to loan to customers.
D. The economy would stabilize and fall to zero inflation.

Answer :

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Final answer:

Lowering the reserve requirement increases the money supply, while raising it decreases the money supply, affecting the availability of loans for customers.

Explanation:

When the Fed lowers the reserve requirement on deposits, the money supply increases. Conversely, when the Fed raises the reserve requirement on deposits, the money supply decreases. For example, a decrease in the reserve requirement would lead to more money being available for banks to loan to customers.

Learn more about Federal Reserve and Money Supply here:

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