Suppose an economy has $200,000 of demand deposits and $40,000 of excess reserves, with a 10% required reserve ratio. If the monetary authorities raise the required reserve ratio to 20%:

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With a required reserve ratio of 10%, the required reserves would be $20,000 ($200,000 x 0.1). Since there are $40,000 of excess reserves, the total reserves in the system are $60,000 ($20,000 required reserves + $40,000 excess reserves). If the required reserve ratio is raised to 20%, the required reserves would now be $40,000 ($200,000 x 0.2). This means that there will be a shortfall of $20,000 in reserves, and the excess reserves will decrease by $20,000 to zero.

Suppose an Economy Has $200,000 of Demand Deposits and $40,000