If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will:
A) Increase the excess reserves of member banks and thus increase the money supply
B) Increase the excess reserves of member banks and thus decrease the money supply
C) Decrease the excess reserves of member banks and thus decrease the money supply
D) Decrease the excess reserves of member banks and thus increase the money supply

Question

Quizplus · Accepted Answer

Increasing the legal reserve ratio means that member banks are required to hold a higher percentage of their deposits in reserve. This reduces the excess reserves available to be lent out by banks, ultimately reducing the money multiplier and decreasing the money supply.