Operating under severe recessionary conditions, the Federal Reserve System decides to reduce its reserve requirements from the current level of 9 percent to 7.5 percent. Which of the following is likely to happen following the Fed's move?
A) The rate of unemployment will double.
B) The rate of growth in the economy will fall drastically.
C) It increases the availability of credit with the commercial banks.
D) Businesses will find it difficult to borrow at cheaper rates of interest.

Question

Quizplus · Accepted Answer

By reducing the reserve requirements, the Fed is allowing commercial banks to have more funds available to lend. This increases the availability of credit, making it easier for individuals and businesses to borrow at lower rates of interest. It does not necessarily have a direct impact on unemployment or economic growth. It could indirectly influence growth by facilitating access to credit for businesses to invest and expand, however, this impact is not as clear cut as the availability of credit.

Operating Under Severe Recessionary Conditions, the Federal Reserve System Decides