When the required reserve ratio is increased, the excess reserves of banks are
A) reduced, but the multiple by which the commercial banking system can lend is unaffected.
B) reduced and the multiple by which the commercial banking system can lend is increased.
C) increased and the multiple by which the commercial banking system can lend is increased.
D) reduced and the multiple by which the commercial banking system can lend is reduced.

Question

Quizplus · Accepted Answer

When the required reserve ratio is increased, banks are required to hold a higher percentage of their deposits in reserve, which means they have less excess reserves to lend out. As a result, the multiple by which the commercial banking system can lend is reduced, as banks have less money to loan out.

When the Required Reserve Ratio Is Increased, the Excess Reserves