If there are no excess reserves in the banking system and the Fed lowers the required reserve ratio,it follows that banks will now have __________,which they can use to extend loans and create new __________.
A) positive excess reserves; checkable deposits
B) negative excess reserves; currency
C) positive excess reserves; currency
D) more vault cash; checkable deposits
E) none of the above

Question

Quizplus · Accepted Answer

When the Fed lowers the required reserve ratio and there are no excess reserves in the banking system, it means that banks were previously holding exactly the required amount of reserves. Lowering the required reserve ratio means that banks now have to hold a smaller percentage of deposits as reserves, leaving them with positive excess reserves that they can use to extend loans and create new checkable deposits. Therefore, option A, positive excess reserves and checkable deposits, would be the correct answer.

If There Are No Excess Reserves in the Banking System