Final answer:
A decrease in reserve requirements in the banking system causes an increase in excess reserves and the supply of loanable funds, leading to a decline in interest rates. None of the options provided in the question directly result from a decrease in reserve requirements.
Step-by-step explanation:
A decrease in reserve requirements typically leads to an increase in excess reserves for banks, as they are required to hold less money in reserve and can lend out more. This effectively increases the supply of money, as more money is available for lending and circulating in the economy.
Answering the student's question, a decrease in reserve requirements would not cause excess reserves to decrease, bond prices to fall directly, an increase in the Fed Funds rate, or state and local government expenditures and borrowing to fall. Therefore, the correct answer is e. none of the above. Instead, a decrease in reserve requirements tends to cause interest rates to decline, as there is an increase in the supply of loanable funds, which typically reduces the price of borrowing.