When the Federal Reserve notifies banks that they must hold fifteen cents for every dollar that is deposited,it is controlling the money supply by using which of the following tools?
A)reserve requirements ratio
B)open market operations
C)discount rate
D)risk
E)unable to tell with the information provided

Question

Quizplus · Accepted Answer

The Federal Reserve controls the money supply through several tools. One of them is the reserve requirements ratio, which specifies the percentage of deposits that banks must hold in reserve. In this case, the Fed is notifying banks that they must hold fifteen cents for every deposited dollar, which means an increase in the reserve requirements ratio. By doing so, the Fed reduces the amount of money that banks can lend, decreasing the money supply.

When the Federal Reserve Notifies Banks That They Must Hold