Suppose the banks in the Federal Reserve System have $1 billion in transactions accounts and the reserve requirement is 0.20.Ceteris paribus,if the reserve requirement is increased to 0.25,then excess reserves will:
A) Increase by $250 million.
B) Increase by $50 million.
C) Decrease by $250 million.
D) Decrease by $50 million.

Question

Quizplus · Accepted Answer

If the reserve requirement is increased to 0.25, then the banks will need to hold 0.25*$1 billion=$250 million in reserves. Currently, the banks have 0.20*$1 billion=$200 million in required reserves. Therefore, they must increase their reserves by $50 million ($250 million-$200 million) to meet the new requirement. This will decrease their excess reserves by $50 million. Thus, the correct answer is choice D – decrease by $50 million.

Suppose the Banks in the Federal Reserve System Have $1