Question

If the required reserve ratio is 100 percent, could the Federal Reserve still change the money supply with open market operations? Explain whether they could or could not.

Answer 1

They can change the money supply only in one direction, that is increase the money supply. This is possible in open market operations when fed buys bonds from banks and injects money into the economy. But on the other hand, if the fed wishes to reduce the money supply by selling the bonds, it won't be possible because the 100% reserve ratio doesn't allow banks to channelize any money (i.e. 0%) to buy the bonds. Therefore, the fed can't decrease the money supply if it wants to in this hypothetical scenario of 100% reserve ratio.

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