Question
Assume the Fed increases the reserve requirements. Illustrate what you anticipate would happen to the Money...
Assume the Fed increases the reserve requirements. Illustrate what you anticipate would happen to the Money Market graph, the Investment graph and the AD/AS graph
Homework Answers
Answer #1
Answer:-
When the Fed increases reserve requirement then supply of money decreases because banks are now able to lend less money in the economy. It shifts Money supply curve leftwards.
Increase in reserve requirement decreases the amount left for lending by the banks so banks increase the interest rate on loan which reduces investment in the economy. It leads to upward movement of investment curve.
A decrease in investment decreases I component of AD and shifts AD curve leftwards.
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