Question

Ceteris paribus, if the Fed raised the required reserve ratio:

		Banks could increase their lending.
		The Federal funds interest rate would rise.
		The size of the monetary multiplier would decrease.
		The size of the monetary multiplier would increase.

Answer 1

Every commercial bank in the country has to keep a certain percentage of their deposits as reserves with the central bank of the country and this is known as the reserve ratio. The reserve ratio is an important tool for controlling the money supply in the economy. An increase in the reserve ration would decrease the excess reserve of commercial banks and there by decreasing the lending so the money supply would decrease.

The size of the money multiplier is calculated with the given below forma.

Money multiplier,

.

Reserve ratio.

So as the denominator increases the value of the multiplier will decrease.

Ans: The size of money multiplier would decrease.