If banks are currently holding zero excess reserves and the Fed lowers the required reserve ratio,which of the following will happen?
A) Banks will have a reserve deficiency.
B) Banks will have positive excess reserves.
C) Banks will extend fewer loans.
D) Banks will call in some of their loans to meet the reserve deficiency.

Question

Quizplus · Accepted Answer

If the Fed lowers the required reserve ratio, banks will be required to hold less reserves, which means they will now have excess reserves. This will give banks the ability to extend more loans and stimulate lending in the economy. There will not be a reserve deficiency, and there will be no need to call in loans to meet any such deficiency.

If Banks Are Currently Holding Zero Excess Reserves and the Fed