Lowering the reserve ratio:
A) Increases the total reserves in the banking system
B) Also reduces the discount rate
C) Turns required reserves into excess reserves
D) Reduces the amount of excess reserves the banks keep

Question

Quizplus · Accepted Answer

Lowering the reserve ratio turns required reserves into excess reserves as banks are required to hold a smaller percentage of deposits as reserves. This can lead to an increase in lending capacity and money supply in the economy. Option A is incorrect as lowering the reserve ratio would decrease the total reserves in the banking system as banks would no longer be required to hold as much in reserves. Option B is incorrect as there is no direct relationship between lowering the reserve ratio and reducing the discount rate. Option D is also incorrect as lowering the reserve ratio would increase the amount of excess reserves the banks keep.

Lowering the Reserve Ratio