When the required reserve ratio is lowered,
A) increases, and the amount of excess reserves increases in the banking system.
B) decreases, and the amount of excess reserves increases in the banking system.
C) decreases, and the amount of excess reserves decreases in the banking system.
D) increases, and the amount of excess reserves decreases in the banking system.

Question

Quizplus · Accepted Answer

When the required reserve ratio is lowered, banks are required to hold a smaller percentage of deposits as reserves. This means they have more funds available to lend out, which increases the money supply in the economy. As a result, the amount of excess reserves in the banking system also increases, as banks have more money to lend out beyond what is required to be held as reserves.

When the Required Reserve Ratio Is Lowered