Assume the Federal Reserve increases the required reserve ratio from 10 to 20 percent and reserves are $80 billion.Then the change in the money supply will be

Question

Quizplus · Accepted Answer

When the required reserve ratio is increased from 10 percent to 20 percent, banks must hold more reserves against their deposits. In this case, reserves are $80 billion, so the banking system is currently supporting a money supply of $800 billion ($80 billion / 0.10). When the reserve ratio is increased to 20 percent, banks must hold $160 billion in reserves ($800 billion * 0.20). This means that the potential money supply has decreased by $80 billion ($160 billion - $80 billion), leading to a contractionary effect on the economy. Therefore, the change in the money supply will be -$80 billion (or a decrease of $80 billion), which is equivalent to answer choice C.

Assume the Federal Reserve Increases the Required Reserve Ratio from 10