Question

A bank currently meets its required reserves when the Federal Reserve announces that required reserves will increase. What effect will this have on the amount of loanable funds?

A. Increase
B. Decrease
C. No change
D. Cannot be determined

Answer 1

An increase in required reserves by the Federal Reserve will have a decreasing effect on the amount of loanable funds available in the economy.

Step-by-step explanation:

An increase in required reserves by the Federal Reserve will have a decreasing effect on the amount of loanable funds available in the economy.

When required reserves increase, banks are required to hold a higher percentage of their deposits, which reduces the amount of money available for lending to businesses and individuals. This means that banks have less money to loan out and as a result, the amount of loanable funds decreases.

For example, if the required reserve ratio is increased from 10% to 15%, banks will have to hold a larger percentage of their deposits instead of lending it out, which reduces the amount of loanable funds.