A decrease in the reserve ratio increases the:

Question

amount of actual reserves in the banking system

amount of excess reserves in the banking system

number of government bonds held by the Reserve Bank

ratio of coins to paper currency in the economy

Answer 1

A decrease in the reserve ratio increases the amount of excess reserves in the banking system.

When the reserve ratio is lowered, banks are required to hold a smaller percentage of deposits as reserves. This means they have more funds available to lend out, which increases the amount of excess reserves. As banks lend more, it can lead to an increase in the overall money supply in the economy.