Question

True or false

Other things being equal, when the Fed raises the reserve requirement, the banking system's excess reserves fall, the deposit expansion multiplier declines, and the money supply decreases.

Answer 1

True. When the Federal Reserve raises the reserve requirement, the banking system's excess reserves fall, the deposit expansion multiplier declines, and the money supply decreases.

Step-by-step explanation:

True. When the Federal Reserve raises the reserve requirement, banks are required to hold a higher proportion of their deposits as reserves. As a result, the banking system's excess reserves decrease, meaning banks have less money available to lend out. This decrease in excess reserves lowers the deposit expansion multiplier, which is the ratio between new deposits created through lending and the initial increase in reserves. Ultimately, the decrease in the deposit expansion multiplier leads to a decrease in the money supply.