In a condition of ample reserve, a decrease in the required reserve ratio O will increase the money supply O Will have no effect on the money supply. O will decrease the money supply O will decrease inflation
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The required reserve ratio is the percentage of deposits that banks are required to hold in reserve and not lend out. This is a tool used by central banks to control the money supply in the economy. Show more…
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If the ratio of reserves to deposits (rdr) increases, while the ratio of currency to deposits (cdr) is constant and the monetary base (MB) is constant, then the money supply increases. The money supply decreases. It cannot be determined whether the money supply increases or decreases. The money supply does not change.
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If the Fed lowers the reserve requirement, then this increases excess reserves, encourages banks to make more loans, and increases the money supply.
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If the Fed wants to increase the money supply, it can BUY OR SELL bonds in open-market operations. If the Fed reduces the reserve requirement, the money supply INCREASES OR DECREASES. If the Fed wants to increase the money supply, it can INCREASE OR DECREASE the interest rate it pays on reserves. When the FOMC decreases its target for the federal funds rate, the money supply will INCREASE OR DECREASE. If bankers decide to hold more excess reserves because they are fearful of bank runs, the money supply DECREASES OR INCREASES.
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