If the Federal Reserve raises the reserve requirement, banks can lend out a _____ percentage of their deposits; therefore, _____ money will be created when the Fed buys Treasury securities.

Question

Quizplus · Accepted Answer

When the Federal Reserve raises the reserve requirement, banks are required to hold a higher percentage of their deposits in reserve, meaning they can lend out a lesser percentage of their deposits. Consequently, less money will be created through the money multiplier effect when the Fed buys Treasury securities, as banks have less capacity to lend.

If the Federal Reserve Raises the Reserve Requirement, Banks Can