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Suppose that the federal reserve enacts expansionary policy. everything else held constant, this will cause the demand for u. s. assets to decrease and the u. s. dollar to depreciate.
The reserve ratio is the quantity of cash deposits that a bank is required to keep on hand and withhold from lending out. The higher the reserve requirement, the less money a bank may lend, but the additional funds also assist the bank avoid failure and improve its balance sheet.
However, when the reserve ratio increases and when it decreases, monetary policy is considered contractionary.
If the Federal Reserve chooses to implement an expansionary monetary policy and lower the reserve ratio, commercial banks will be able to raise the amount of loans they make to individuals and companies.
The effect is an increase in the money supply, economic growth, and inflation rate.
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