Federal Reserve lowers reserve requirment to 1.25% what wil happen to the bank lending, supply of money, aggregrate demand and the interest rate and why?
When the Federal Reserve lowers the reserve requirement to 1.25%, it will likely have an impact on bank lending, the supply of money, aggregate demand, and the interest rate. Let's break down how each of these factors might be affected:
1. Bank lending: Lowering the reserve requirement means that banks are required to hold less money in reserves and have more funds available for lending. Consequently, banks are more likely to extend loans to consumers and businesses since they have a larger pool of funds to borrow from.
2. Supply of money: By reducing the reserve requirement, the Federal Reserve effectively injects more money into the banking system. This increases the overall supply of money in the economy since banks have more funds available to lend. As a result, the supply of money in circulation will likely increase.
3. Aggregate demand: With an increase in the supply of money and more lending by banks, it can lead to an increase in aggregate demand. When individuals and businesses have access to more loans, they can spend more, which stimulates economic activity. This increase in spending can lead to higher aggregate demand for goods and services.
4. Interest rates: Lowering the reserve requirement can also have an impact on interest rates. With more funds available for lending, banks may compete to attract borrowers by offering lower interest rates. Additionally, a higher supply of money can put downward pressure on interest rates, as the increased availability of funds may drive down borrowing costs.
Overall, the combination of increased bank lending, a larger supply of money, higher aggregate demand, and potentially lower interest rates can stimulate economic activity and encourage borrowing and spending. However, it's important to note that the impact of lowering the reserve requirement can vary depending on the specific economic conditions and other factors at play in the economy.