When the Fed decreases reserve requirements, it:
A)increases the reserve-deposit ratio (rr).
B)decreases the reserve-deposit ratio (rr).
C)increases the monetary base (B).
D)decreases the monetary base (B).

Question

Quizplus · Accepted Answer

When the Fed decreases reserve requirements, it decreases the required reserve ratio (rr), reducing the amount of reserves that banks are required to hold against their deposits. This leads to a decrease in the reserve-deposit ratio (rr), as banks are now required to hold less in reserves relative to their deposits. This also increases the amount of funds that banks have available to lend out, which could potentially increase the money supply or velocity of money. However, it does not directly impact the monetary base (B), which is determined by the Fed's open market operations and the amount of currency in circulation.

When the Fed Decreases Reserve Requirements, It