Feds System Tools and Monetary Policy Quick Check

Question

2 of 52 of 5 Items
Question
Which of the statements below is an accurate description of the economy's reaction to changes in the reserve requirements (interest rates)?(1 point)
Responses

If the reserve requirements tightened, less funds are in reserves and banks do not have as much funds to lend, leading to a decrease in interest rates for customers and an increase in economic growth.
If the reserve requirements tightened, less funds are in reserves and banks do not have as much funds to lend, leading to a decrease in interest rates for customers and an increase in economic growth.

If the reserve requirements loosened, more funds are in reserves and banks do not have as much to lend, leading to an increase in interest rates and a decrease in economic growth.
If the reserve requirements loosened, more funds are in reserves and banks do not have as much to lend, leading to an increase in interest rates and a decrease in economic growth.

If the reserve requirements loosened, less funds are in reserves and banks would have more to lend, leading to an increase in interest rates and an increase in economic growth.
If the reserve requirements loosened, less funds are in reserves and banks would have more to lend, leading to an increase in interest rates and an increase in economic growth.

If the reserve requirements tightened, more funds are in reserves and banks do not have as much to lend, leading to an increase in interest rates for customers and a decrease in economic growth.
If the reserve requirements tightened, more funds are in reserves and banks do not have as much to lend, leading to an increase in interest rates for customers and a decrease in economic growth.
Skip to navigation

Answer 1

The correct interpretation of how reserve requirements affect the economy is as follows:

• When reserve requirements are tightened, banks are required to hold more reserves and have less money available to lend. This typically leads to increased interest rates because banks charge more for loans due to the limited availability of funds. Higher interest rates can slow down economic growth as borrowing becomes more expensive.

• Conversely, when reserve requirements are loosened, banks are required to hold less in reserves, which allows them to lend more. This often results in decreased interest rates as banks have more funds to offer at lower rates, potentially stimulating economic growth by making it cheaper to borrow money.

Given this understanding, the most accurate response is:

"If the reserve requirements tightened, more funds are in reserves and banks do not have as much to lend, leading to an increase in interest rates for customers and a decrease in economic growth."

This statement correctly reflects that tightening leads to higher interest rates and dampened economic growth.