Other things equal, when the Fed raises the reserve requirement, the banking system's excess reserves will fall, the deposit expansion multiplier will decline, and the money supply will decrease.

Question

Quizplus · Accepted Answer

When the Fed raises the reserve requirement, banks are required to hold a larger portion of their deposits in reserves, leaving them with less excess reserves to lend out. This decreases the money multiplier, which is the factor by which reserve balances can be multiplied to calculate the potential increase in the money supply. As a result, the money supply will decrease.

Other Things Equal, When the Fed Raises the Reserve Requirement