When the Fed decreases the reserve requirement, the money supply is expected to:

Question

Quizplus · Accepted Answer

When the Federal Reserve decreases the reserve requirement, banks are required to hold less money in reserve and can lend out more of their deposits. This increases the money supply because more money is being created through the lending process. Additionally, the money multiplier, which measures the maximum amount of money that can be created by a given amount of reserves, also expands because each dollar of reserves supports a larger amount of created money.

When the Fed Decreases the Reserve Requirement, the Money Supply