The reserve requirement:
A) Is the most frequently used tool by the Fed.
B) Changes required reserves but not excess reserves.
C) Does not affect the lending capacity for a bank.
D) Affects the level of bank reserves.

Question

Quizplus · Accepted Answer

The reserve requirement is a tool used by the Federal Reserve to influence the amount of reserves banks hold. By changing the reserve requirement, the Fed can affect the level of bank reserves and thus, their lending capacity. This makes choice D the correct answer. Choice A is incorrect because open market operations are actually the most frequently used tool by the Fed. Choice B is incorrect because the reserve requirement affects both required reserves and excess reserves. Choice C is incorrect because the reserve requirement directly impacts a bank's ability to lend.

The Reserve Requirement