Final answer:
When the Federal Reserve changes the reserve requirement, it directly affects the amount of money that banks can lend out. A higher reserve requirement means less money available for lending, while a lower requirement increases lending capacity.
Step-by-step explanation:
The statement about the Federal Reserve (the Fed) altering the reserve requirement to influence the level of bank reserves and the lending capacity of the banking system is true. When the Fed increases the reserve requirement, banks are mandated to keep a higher percentage of deposits in reserves, reducing the amount available for lending, which in turn leads to a decrease in the money supply.
Conversely, reducing the reserve requirement allows banks to lend out more of their deposits, increasing the money supply. This mechanism is one of the ways through which the Fed conducts monetary policy to maintain economic stability. An increase in reserve requirements would reduce the supply of money, since more money would be held in banks rather than circulating in the economy.