Suppose the banks in the Federal Reserve System have $100 million in transactions accounts and the reserve requirement is 0.10.Ceteris paribus,if the reserve requirement is decreased to 0.07,then excess reserves will increase by:
A) $3 million.
B) $7 million.
C) $10 million.
D) $700 billion.

Question

Quizplus · Accepted Answer

With a decrease in the reserve requirement from 0.10 to 0.07, banks are required to hold less in reserves for every dollar of transactions accounts. Originally, at a 10% reserve requirement, banks needed to hold $10 million in reserves ($100 million * 0.10). With the reserve requirement reduced to 7%, they now need to hold $7 million in reserves ($100 million * 0.07). The difference, $3 million, represents the increase in excess reserves.

Suppose the Banks in the Federal Reserve System Have $100