Question

Explain how to use the reserve requirement to expand the money supply. And how does it impact the regular human in the United States?

Answer 1

Reserve requirement is the amount which all the commercial banks have to keep with them. The higher the reserve requirement the higher amount of money in proportion to the saving in the bank has to be kept aside as the reserve. The banks can't lend this money as a loan.

When the reserve requirement is lowered the banks have to keep less money with them and this increases the amount they can lend. This increased capacity to lend leads to a higher money supply. If the reserve requirement is high the banks can lend less and reduce the money supply in the market.  

A lower reserve requirement will reduce the interest rates and help increase the investment and demand in the economy. It will increase the income of the people in the economy and make the borrowing easier.