Additional Tradition Tools over The Money Supply - Reserve Requirements

5 important questions on Additional Tradition Tools over The Money Supply - Reserve Requirements

What can the Fed change for banks?

The institution can modify the reserve requirement for financial institutions.

What is the reserve requirement?

This is the minimum ratio of bank deposits that must be kept in reserves.

What happens when the reserve requirement is raised?

An increase reduces banks' ability to lend and decreases the money supply.
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What effect does lowering the reserve requirement have?

Decreasing it improves lending capacity and increases the money supply.

Why is the reserve requirement rarely changed?

Changes can significantly disrupt the banking system overall.

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