Question

Say that Fed policy requires all banks to hold 8% of deposits in reserves. If Ventura Bank does not hold any excess reserves and the Fed increases the reserve requirement to 10%, what will be the result

Answer 1

the money supply decreases

Step-by-step explanation:

Reserve ratio is the percentage of deposits that is required of commercial banks to keep as reserves. The higher the ratio, the lower the money supply

For example, assume reserve ratio is initially 8% of deposits. It is later reduced to 10%. 1000 is deposited

Increase in money supply = deposit / reserve ratio

1000 / 0.08 = 12,500

1000 / 0.1 = 10,000

It can be seen the money supply decreased when reserve ratio was increased from 8% to 10%