Question

Reserve requirements are computed as percentages of deposits that commercial banks must hold as vault cash...

Reserve requirements are computed as percentages of deposits that commercial banks must hold as vault cash or on deposit at a Federal Reserve Bank. The Fed should raise such percentages in order to increase the nation's money supply to combat a recession. True or False?

Homework Answers

Answer #1

False

If we talk in simple terms and reserve requirements are the minimum amount of cash vaults or money that commercial banks has to maintained and it cannot be lended

In United States, it is around 10%

Now when time of recession hits then economy slows down, unemployment rates are all time high, business cycle goes down etc

In time of recession, it lowers the reserve requirement for commercial banks

So for combating this the FED adopts for expansionary monetary policy in which it was it lowers the reserve requirement ratio and increase the money supply

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