Question

Suppose the time period is before October 2008 and the Fed lowers the required reserve ratio. __________ in the banking system would remain unchanged but __________ would rise. This would (likely) lead to an increase in new loans and checkable deposits and a(n) __________ in the money supply.

a. Reserves; vault cash; decrease
b. Excess reserves; vault cash; increase
c. Reserves; required reserves; increase
d. Reserves; excess reserves; increase

Answer 1

If the Fed lowers the required reserve ratio, total reserves stay the same but excess reserves increase, leading to more loans, higher checkable deposits, and an increased money supply.

Step-by-step explanation:

Suppose the time period is before October 2008 and the Federal Reserve lowers the required reserve ratio. Reserves in the banking system would remain unchanged but excess reserves would rise. This would likely lead to an increase in new loans and checkable deposits and an increase in the money supply.

The answer to the fill-in-the-blank question is: Reserves; excess reserves; increase. When the Fed lowers the required reserve ratio, total reserves in the banking system stay the same, but banks now have fewer required reserves and more excess reserves they can lend out. This additional capacity to make loans would most likely result in banks creating more loans and therefore increasing the checkable deposits and the overall money supply.