Question

If the Federal Reserve wants to increase the money supply in the economy using Reserve Requirement (RR), what does it do?

Answer 1

If Federal Reserves want to pump into more money supply in the US economy, it will review its monetary policy. Monetary policy is an important instrument of the Central Bank of any country to regulate the cash inflow in the economy. Federal Reserves will reduce the cash reserve ratio requirements for all banks in US so that banks have more funds to lend borrowers for various purposes. This will increase cash inflow in the economy and boost economic activities but lowering cash reserve ratio at the same time also increases inflation in the economy.

The cash reserve ratio is the proportion of fund which every bank in US had to maintain with Federal Reserves. Increasing cash reserve ratio results less cash availability at banks for loans, which is used to contain growing inflation in the economy. Conversely, if Federal Reserves lower the cash reserve ratio, it will allow banks to have more funds for business and personal loans.