When the required reserve ratio is lowered, the money multiplier ,
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 their deposits in reserves. This increases the amount of money that banks can lend out, which in turn increases the money supply through the money multiplier effect. As banks have more resources to lend, the amount of excess reserves also increases in the banking system.

When the Required Reserve Ratio Is Lowered, the Money Multiplier