Answer to Question #222549 in Macroeconomics for Muskan saifi

Question

(a) Graphically illustrate and brefiely explain the impact of an increase in the reserve ratio , Ɵ, on the money for central bank money.

Answer 1

The increase in the reserve ratio would result in the contraction monetary policy which would result in the fall in the central bank money supply in the economy. The increase in the reserve ratio would result in the increase in the ratio of the total deposits of the banks to be kept as reserves. The increase in the cash reserves would cause a fall in the lending capacity of the banks. Thus, reserve ratio being a quantitative control over the quantity of money would result in the fall in the central bank money supply through the fall in the money multiplier.

The fall in money supply results in an rise in the interest rate and the fall in the price level in the economy. The fall in the money supply results from an increase in the reserve ratio which cause a fall in the money multiplier.