The Fed seldom uses the reserve requirement ratio to influence the money supply. What is the reason for this?
A) It is difficult and costly for the Fed to monitor compliance.
B) Frequent manipulation of reserve requirements would require bankers to constantly adjust their lending policies to changing requirements, which could be destabilizing for financial markets.
C) The Fed would like to discourage banks from making loans indiscriminately and therefore sets just one standard.
D) Reserves in excess of a certain amount will not be covered by the Federal Depository Insurance Corporation.

Question

Quizplus · Accepted Answer

Frequent manipulation of reserve requirements would require bankers to constantly adjust their lending policies to changing requirements, which could be destabilizing for financial markets. This would create uncertainty for banks and could lead to a decrease in lending, which could negatively impact the economy. Therefore, the Fed tends to use open market operations and other tools to influence the money supply rather than the reserve requirement ratio.

The Fed Seldom Uses the Reserve Requirement Ratio to Influence