For a given level of reserves, a decrease in the reserve requirement ratio will
A) decrease legal reserves and decrease the money supply.
B) increase legal reserves and decrease excess reserves.
C) decrease legal reserves and increase excess reserves.
D) decrease excess reserves and decrease the money supply.

Question

Quizplus · Accepted Answer

A decrease in the reserve requirement ratio means that banks are required to hold a smaller percentage of deposits as legal reserves. This means that a part of the reserves that the bank had to hold previously will now become excess reserves. Therefore, legal reserves will decrease and excess reserves will increase. This will lead to an increase in the money supply as banks will have more excess reserves that they can lend out to customers.

For a Given Level of Reserves, a Decrease in the Reserve