Question

If the Federal Reserve decreases required reserves, financial institutions will likely lend out _____________ than before, thereby ____________________ aggregate demand and equilibrium income in order to help eliminate a(n) ___________________________. Group of answer choicesmore; decreasing; recessionary gapmore; increasing; inflationary gapless; decreasing; inflationary gapmore; increasing; recessionary gap

Answer 1

Answer: more; increasing; recessionary gap

Explanation:

When the Fed decreases the Required Reserves which is how much of deposits that Banks are required to hold, the banks will have more money to lend out and so will lend out more than before.

This will increase the Aggregate Demand and equilibrium income because people would borrow more money which they can use to demand more goods and services.

When this happens the Economic grows as producers will try to produce more goods as well as employ more people. This Growth will pull the economy out of the Recessionary gap it would have been going through which refers to a situation where the Real GDP is less than the Potential GDP.