Final answer:
Economic uncertainty and changes in consumer optimism are two factors that influence the level of excess reserves in the banking system. Banks increase reserves during uncertain times for safety, and changes in spending habits can also necessitate holding more reserves. Central bank policies also affect reserves, though impacts may be delayed.
Step-by-step explanation:
The two factors that influence the level of excess reserves in the banking system are economic uncertainty and changes in consumer optimism. During periods of economic uncertainty, banks may be concerned about borrowers' ability to repay loans and the potential for a bank panic, leading them to hold higher excess reserves. The second factor, changes in consumer optimism, can result in fluctuations in spending which also impacts the level of reserves banks choose to maintain. For instance, in a national emergency where consumers need to purchase many items quickly, the demand for cash can increase, prompting banks to hold more reserves.
Banks are legally mandated to hold a certain level of reserves, but they can hold additional excess reserves as a buffer against potential financial shocks. During economic downturns, such as a recession, banks might increase their excess reserves due to the fear that a higher proportion of loan applicants will default on their repayments.
Monetary policy plays a role in influencing excess reserves, though its effects are often delayed. Consequently, central banks need to act with caution as their actions can introduce new economic instabilities instead of resolving them.