When the reserve requirement is increased,

Question

Quizplus · Accepted Answer

When the reserve requirement is increased, depository institutions are required to hold a higher percentage of their deposits as reserves. This means that their excess reserves are reduced, which can limit their ability to lend out money. Therefore, the correct answer is that excess reserves of depository institutions are reduced. Choice A is incorrect because an increase in the reserve requirement means that required reserves increase, not decrease. Choice B is incorrect because required reserves cannot be converted to excess reserves. Choice C is incorrect because an increase in reserve requirements does not necessarily mean that the discount rate will increase. Choice E is incorrect because an increase in reserve requirements means that depository institutions will have less reserves to loan out, not more.

When the Reserve Requirement Is Increased