Recall from Question 6 in this homework that the money supply as measured by che

Question

Recall from Question 6 in this homework that the money supply as measured by checkable deposits is currently $750 billion. The required reserve ratio is 30%. Banks hold $225 billion in reserves. Thus, there are no excess reserves. The Federal Reserve wants to decrease the money supply by $50 billion, to $700 billion. It could do so through open market operations or by changing the required reserve ratio If the Federal Reserve wants to decrease the money supply by adjusting the required reserve ratio, it should the required reserve ratio.

Explanation / Answer

Money supply decreases (increases) when required reserve ratio increases (decreases). So,

Fed should Increase the required reserve ratio.

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