Asked by Grace Kushner on Jun 13, 2024
Verified
When the reserve requirement is increased,
A) required reserves are reduced.
B) required reserves are converted to excess reserves.
C) the discount rate will increase.
D) excess reserves of depository institutions are reduceD.
E) depository institutions that are loaned up will have more reserves to loan.
Reserve Requirement
The reserve requirement is the minimum amount of reserves that banks must hold against deposits, set by monetary authorities to control the money supply.
Required Reserves
The minimum amount of funds that a bank must hold in reserve against deposit liabilities, as mandated by central banking regulations, to ensure liquidity and stability in the banking system.
Excess Reserves
The surplus of reserves held by banks over and above the regulatory requirements, often indicating caution or a lack of lending opportunities.
- Discover and describe the apparatus of monetary policy used by the Federal Reserve, counting open market operations, discount rate, and reserve requirements.
Verified Answer
AV
Arjun VenkatJun 17, 2024
Final Answer :
D
Explanation :
When the reserve requirement is increased, depository institutions are required to hold a higher percentage of their deposits as reserves. This means that their excess reserves are reduced, which can limit their ability to lend out money. Therefore, the correct answer is that excess reserves of depository institutions are reduced. Choice A is incorrect because an increase in the reserve requirement means that required reserves increase, not decrease. Choice B is incorrect because required reserves cannot be converted to excess reserves. Choice C is incorrect because an increase in reserve requirements does not necessarily mean that the discount rate will increase. Choice E is incorrect because an increase in reserve requirements means that depository institutions will have less reserves to loan out, not more.
Learning Objectives
- Discover and describe the apparatus of monetary policy used by the Federal Reserve, counting open market operations, discount rate, and reserve requirements.