If the fed reduces the required reserve ratio,excess reserves and the money supply both will decrease.
What happens if the Federal Reserve lowers the reserve ratio?
- One method through which the U.S. government attempts to manage the money supply and hence the economy of the country is through the monetary policy of the Federal Reserve.
- It must strike a balance between rising inflation and economic development.
- The reserve ratio is the central bank's demand that banks maintain a specific level of surplus cash deposits, which must be held in reserve and not lent out.
- Raising the ratio has a contractionary effect since fewer loans may be provided, but it also strengthens the balance sheets of the banks.
- Commercial banks are free to extend additional loans if the Federal Reserve instead reduces the reserve ratio through an expansionary monetary policy.
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