When the Federal Reserve lowers the interest on reserves the prime rate decreases
- When the prime rate decreases the economy slows down and consumers start to restrict the purchase and industries curtail to expand Hence Federal Reserve decreases the reserve ratio so that consumers and businesses take more loans and the economy pace up
- 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. As reduced finance costs can encourage borrowing and investing, the Federal Reserve reduces interest rates to promote economic growth.
- Rates, on the other hand, might encourage excessive growth and subsequent inflation when they are too low, which would lower purchasing power and jeopardize the sustainability of the economic development.
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