Chapter 15.3, Problem 3R

To determine

To evaluate: The reserve requirements to decrease money supply.

Explanation of Solution

The reserve ratio determines the quantity of reserve needed for banks to hold in cash. In a vault, these banks may either keep the cash on hand or place it with a nearby Federal Reserve Bank.

If the Fed reduces the reserve ratio, it reduces the quantity of cash that the banks are needed to hold in deposits, enabling consumers and companies to make more loans. This raises the money supply to the country and expands the economy.

One of the forms in which the U.S. government seeks to regulate the economy of the country by regulating the money supply is the monetary policy of the Federal Reserve. With rising inflation, it requires to balance economic growth.