Question

when the fed increases the required reserve ratio, a bank's a. excess reserves are decreased. b. excess reserves are increased. c. excess reserves are unaffected.

Answer 1

Increasing the required reserve ratio leads to a decrease in a bank's excess reserves, (option a) constraining the amount they can lend and reducing the supply of money in the economy.

Step-by-step explanation:

When the Federal Reserve increases the required reserve ratio, a bank's excess reserves are decreased. This is because increasing the required reserve ratio means that banks must hold a larger fraction of deposits as reserves, and cannot use as much for making loans or other investments. Since excess reserves are those reserves that banks hold over the minimum required, an increase in the requirement reduces the amount available as excess. This change may lead banks to hold back on lending during uncertain economic conditions to ensure they meet the new requirements, thus reducing the supply of money in the economy.