When the Fed lowers the required reserve ratio, it:
A) lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public
B) raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public.
C) increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public.
D) increases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.
E) decreases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.

Question

Quizplus · Accepted Answer

When the Fed lowers the required reserve ratio, it reduces the minimum amount of reserves that banks are required to hold. This increases the amount of excess reserves that banks have, which can be used for lending and investing activities. This policy is meant to encourage banks to make more loans to the general public, as they have more funds available to lend out. Thus, the correct answer is C.

When the Fed Lowers the Required Reserve Ratio, It