The effect of an increase of required reserves by the Fed is:
A)a decrease in loanable funds of depository institutions
B)a decrease in interest rates
C)usually an increase in vault cash
D)to stimulate activity in the home construction field

Question

Quizplus · Accepted Answer

Increasing required reserves by the Fed means that depository institutions have to hold a larger portion of their deposits, thus decreasing their available loanable funds. This decreases the amount of money in circulation and increases the cost of borrowing, leading to a decrease in the money supply and an increase in interest rates. Vault cash, which refers to the cash reserves held by banks in their own vaults, may or may not increase depending on the specific circumstances. There is no direct link between increasing required reserves and stimulating activity in the home construction field.

The Effect of an Increase of Required Reserves by the Fed