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To offset the effect of households and firms deciding to hold less currency, the Federal Reserve...

To offset the effect of households and firms deciding to hold less currency, the Federal Reserve could

A) raise bank taxes. B) sell Treasury securities. C) raise government spending. D) lower the required reserve ratio.

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Answer #1

Because households and firms are holding less currency it implies that currently the rate of interest is very high and they are depositing their money in the bank or in bond market. the rate of interest has to be brought down and this can be done by lowering the reserve ratio. The required reserve ratio is reduced banks will have more reserves which means rate of interest is reduced and the opportunity cost of holding money decreases. Households and firms will now hold more currency.

Option D is correct

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