Question

What is most likely to happen to the price level and real GDP if the Fed raises the Required Reserves Ratio from 10% to 15%.

Select one:

a. Price level and real GDP will both increase

b. Price level and real GDP will both decrease

c. Price level will increase, but real GDP will decrease

d. Price level will decrease, but real GDP will increase

e. Monetary policies have no effect on the economy

Answer 1

B

As Fed has raised reserve ratio thus now banks will be left with lesser amount of money to pass on to the borrowers i.e. in the form of loans. Thus reduced loans will lead to lesser investment thus lower money circulation the economy leading to reduced prices. Also lesser investment will directly impact the economic growth thus reducing real GDP