If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will
A) increase the excess reserves of member banks and thus increase the money supply.
B) increase the excess reserves of member banks and thus decrease the money supply.
C) decrease the excess reserves of member banks and thus decrease the money supply.
D) decrease the excess reserves of member banks and thus increase the money supply.

Question

Quizplus · Accepted Answer

If the legal reserve ratio is increased by the Federal Reserve System, member banks will be required to hold a higher proportion of their deposits as reserves. This will decrease the excess reserves of member banks, reducing the amount of money that they are able to lend out. As a result, the money supply will decrease.