Suppose the banks in the Federal Reserve System have $400 million in transactions accounts and the reserve requirement is 0.10.Ceteris paribus,if the reserve requirement is decreased to 0.05,then excess reserves will increase by:
A) $1 million.
B) $20 million.
C) $40 million.
D) $2 billion.

Question

Quizplus · Accepted Answer

With a reserve requirement of 0.10, banks need to hold $40 million in reserves (10% of $400 million). If the reserve requirement decreases to 0.05, they only need to hold $20 million (5% of $400 million). This change reduces required reserves by $20 million, increasing excess reserves by the same amount.

Suppose the Banks in the Federal Reserve System Have $400