Due to the market expectations about increasing inflation and in order to increase liquidity in the...
Due to the market expectations about increasing inflation and in order to increase liquidity in the banking industry, the Fed decides to increase required reserve ratio to 15%. At the same time the Fed decrease the actual supply by 1,000 million dollars. What is the change in total trading cash volume in this economy?
Homework Answers
Ans. This policy would reduce the Money Supply in the economy , if the actual supply is reduced by 1000 million dollars , then the Total Trading Cash volume would also decrease by $1000 million . Increase in Reserve Requirement would mean that Commercial Banks would have to hold more of their money in the form of reserves , so Lending would reduce and hence reducing the money supply.
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Due to the market expectations about increasing inflation and in
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