Sample Essay

The reserve requirement is one of the least used tools by the Fed to control money supply. This is mostly because changing reserve requirements is less accurate(in the sense that it is harder to measure the exact impact on money supply) then conducting open market operations. This is because it would affect each depository institution differently, depending on what their deposit base is. The reserve requirement is set by a reserve ratio which the Fed sets. The reserve requirement tool works this way; if the Fed increases the reserve requirement that would mean that more of the money will go to the Fed rather than into the market. That means that an increase in the reserve requirement would result in a decrease in the money supply.

Consumers decide to save and reduce their spending on consumer goods

Consumer spending accounts for a significant part of the economic activity in America and constitutes a huge chunk of total aggregate demand. In recent recessionary times the tough job market has significantly brought down consumer spending. One significant impact that reduced consumer spending will have is reduction in the demand for money. Generally one of the things that result in reduced consumer spending and increased saving is an increase in interest rates which attracts individuals to save rather to spend.

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