Question

True or False:  The Federal Reserve can alter the size of the money supply by changing reserves or changing reserve requirements.

Answer 1

Ans. True

The Federal Reserve can change the money supply by changing ( increase/ decrease) reserves or reserve requirements.

When the Fed reduces the reserve requirements, it allows the banks to hold less cash as reserves and issue more loans. It leads to an increase in the money supply. Similarly, when the Fed increases the reserve requirements, it forces the banks to hold more cash as reserves and issue fewer loans. It leads to a decrease in the money supply.