Capital MarketsQuestion 349 of 398
When the Federal Reserve raises the reserve requirement for banks, what is the likely effect?
a.Banks can lend more, expanding the money supply
b.There is no effect on lending
c.Banks can lend less, contracting the money supply and tending to raise interest rates
d.The federal budget deficit automatically shrinks
Explanation
Raising the reserve requirement forces banks to hold more funds in reserve, leaving less available to lend. This contracts the money supply and tends to push interest rates higher, a contractionary monetary policy action.
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