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If the FED increases the reserve requirement ratio,(check all that apply) banks will be able to...

If the FED increases the reserve requirement ratio,(check all that apply)

banks will be able to make more loans
excess reserves and loans will fall
the money supply will fall
the money supply will rise
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Answer - If Federal Reserve increase reserve requirement ratio then banks will have more funds as reserve. Therefore they will have fewer funds to loan. The Fed uses reserve requirement ratio as an important tool for monetary policy. Since banks cannot increase loans by money multiplier process, hence money supply will fall in the economy. Only two statements will be applicable if FED increases the reserve requirements ratio,

(1) Excess reserves and loans will fall

(2) The money supply will fall.

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