Question

Using a supply-and-demand graph for the market for money, model how interest rates would change if the Federal Reserve announced that it was increasing the required reserve ratio.

Answer 1

If the Federal Reserve decides to lower the reserve ratio through an expansionary monetary policy commercial banks are required to hold less cash on hand and are able to increase the amount of loan to give customers in Businessman this increases the money supply in economic growth and the rate of inflation when the Federal Reserve increases the required reserve ratio the money supply in the economic growth and the rate of inflation goes down. The Federal Reserve monetary policy is one of the ways in which the government tries to regulate the economy by controlling the money supply it needs to balance economic growth and increasing inflation if a dog's to expansionary monetary policy it expands economic growth and also increases the rate of inflation if it adopts a contractionary monetary policy produces inflation and also reduces the growth the three ways in which Federal Reserve achieve an expansionary and contractionary monetary policy is through the use of discount rate the reserve ratio or reserve requirements and open market operations the reserve ratio shows the Reserve amounts required to be held in cash by banks the spanx can either keep the cash on hand in vault Olive behind its local Federal Bank the exact reserve ratio depends on the size of banks asset when the Federal Bank close the reserve ratio it lowers the amount of cash banks are required to hold in reserves in allow them to make more noise to consumers and businesses just increase the money supply when the Federal Bank increases the reserve ratio it increases the amount of cash a bank is required to hold in its reserve and it does not allow the bank to make loans to consumer or anybody this decreases the money supply and and contracts the economy and decrease in inflation. Let's understand what a reserve requirements banks another depository Institutions saving institution credit unions in foreign banking entities days are required to hold a portion of there reserve. Reserve requirements are the percentage of deposit that depository Institutions must hold in reserve and not lend out. When the Federal Reserve increases the reserve ratio. Reasons why reserve requirements are not frequently change the most important of which is that open market operations provide a much more precise tool for implementing monetary policy the impact of changes in reserve requirements is difficult to estimate to change has the potential to affect 1000 of depository institution in different ways depending on each Institutions deposit base changes in reserve requirements also typically lead to changes in pricing schedule for some Bank services because some Bank fees and credits are settled on reserve requirements. in this in this as we see in this as we see that in this as we see that the in this as we see that the when the federal in this as we see that the when the Federal in this as we see that the when the Federal Reserve in this as we see that the when the Federal Reserve increases the in this as we see that the when the Federal Reserve increases the reserve ratio. In the following graph as we see the required reserve amount the banks are required with full from each deposit the Reserve when the Federal Reserve decreases the reserve ratio then banks will have less RR and more in excess reserves the money will go into the banks excess reserves to be Londa out and money supply will increase