Assume the commercial banking system has checkable deposits of $20 billion and excess reserves of $2 billion when the reserve ratio is 25 percent. If the reserve ratio is then lowered to 20 percent, we can conclude that the
A) banking system now has excess reserves of $3 billion.
B) monetary multiplier has decreased.
C) maximum money-creating potential of the banking system has been increased by $7 billion.
D) Fed has decided that money supply needed to be reduced.

Question

Quizplus · Accepted Answer

When the reserve ratio is lowered from 25% to 20%, the required reserves decrease, increasing excess reserves by $1 billion, making them $3 billion.

Assume the Commercial Banking System Has Checkable Deposits of $20