The effect of an increase of required reserves by the Fed is
A) a decrease in loanable funds of depository institutions.
B) a decrease in interest rates.
C) an increase of excess reserves.
D) to stimulate activity in the home construction field.

Question

Quizplus · Accepted Answer

When required reserves are increased by the Fed, depository institutions will have to hold more money in reserves which will decrease the amount of money available for lending or loanable funds. This decrease in loanable funds will lead to an increase in interest rates as the demand for loans will exceed the supply of loanable funds. Thus, option A is the correct answer. Option B is incorrect as there will be an increase in interest rates, not a decrease. Option C is also incorrect as an increase in required reserves will lead to a decrease in excess reserves. Option D is irrelevant and unrelated to the increase in required reserves.

The Effect of an Increase of Required Reserves by the Fed