Question

When the Federal Reserve wants to decrease the money supply, it can: Please choose the correct answer from the following choices, and then select the submit answer button. Answer choices lower the required reserve ratio. raise the required reserve ratio. buy Treasury bills. lower the discount rate.

Answer 1

Raise the required reserve ratio.

Step-by-step explanation:

The reserve ratio is the amount of reserves that commercial banks must hold as a percentage of the total amount of funds.

In the United States, the reserve ratio is currently around 10 percent, which means that banks must keep 10 percent of their total demand deposits as reserve.

Because commercial banks literally create money when they make loans, loans that are made with the money they obtain from the demand deposits that users provide, raising the reserve ratio is a powerful tool that the Federal Reserve has if it wants to decrease the money supply.

This is because a higher reserve ration means that commercial banks will have to keep more demand deposits as reserves, reducing the amount of funds they can loan out, in turn decreasing the quantity of money that they create, which lowers the money supply.