If the Fed wants to discourage bank lending, then it should ________ the required reserve ratio on checkable deposits.

Question

Quizplus · Accepted Answer

If the Fed wants to discourage bank lending, it should raise the required reserve ratio on checkable deposits. By raising the reserve requirement, banks have to hold a larger portion of their deposits in reserve and have less money to lend out, thus discouraging lending. Lowering the reserve requirement would increase the amount banks can lend out and encourage lending. Maintaining the reserve requirement at a constant rate would not have any effect on bank lending. The Fed does have the power to change the reserve requirement.

If the Fed Wants to Discourage Bank Lending, Then It