Question

The power of the federal reserve to expand the total money supply is considered restricted if

Answer 1

The federal reserve can increase the money supply in the economy through its monetary policy . This includes bank rate, minimum reserve and open market operations

Now, the expansion of money supply is restricted if

• the commercial banks hold less as excess reserves

Reserve ratio is the amount of money the commercial banks has to keep with federal reserve . The amount of money remaining with the commercial banks over and above the minimum reserves is known as excess reserves. If the excess reserves are less then the increase in money supply will also be less even if the federal reserve reduces the minimum reserve ratio.

• if there is pesimissm in the economy, that is when the prices are falling

In this scenario even if we lower the bank rate, the interest rate charged by the federal reserve on commercial banks , will not make the businessmen to borrow.