If commercial banks are maintaining a 4 percent reserve/deposit ratio and the fed raises the required reserve ratio to 6 percent, then banks will ______ their loans based on current deposits, and the money supply will _____.
Business · High School · Mon Jan 18 2021
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If the Federal Reserve raises the required reserve ratio from 4 percent to 6 percent, commercial banks will be required to hold a larger proportion of their deposits as reserves. This means they will have to reduce the amount of money they can lend out, as they need to keep a higher percentage of their deposits as reserves.
Therefore, the banks will decrease their loans based on current deposits, leading to a decrease in the money supply. The higher reserve requirement reduces the multiplier effect, which is the ability of banks to create money through the lending process. As a result, there is a contractionary effect on the money supply.