Question

If the Fed were to impose a slight increase in the required reserves ratio, there would be _____.


a decrease in the money supply


an increase, then a decrease, in the money supply


an increase in the money supply


no change in the money supply

Answer 1

If the Fed were to impose a slight increase in the required reserves ratio, there would be **a decrease in the money supply**.

When the required reserves ratio increases, banks are required to hold a larger fraction of their deposits in reserve and have less available to lend out. This typically leads to a reduction in the money supply as there are fewer loans being created by the banking system.