An increase in the required reserve ratio by the Federal Reserve would:
A) cause M1 to contract.
B) cause M1 to expand.
C) have no effect on M1 or M2.
D) affect only M2, not M1.

Question

Quizplus · Accepted Answer

An increase in the required reserve ratio by the Federal Reserve would cause M1 to contract, because banks would have to hold more reserves and would therefore be able to lend out less money to consumers and businesses. This would reduce the amount of money in circulation and decrease M1.

An Increase in the Required Reserve Ratio by the Federal