Assume the commercial banking system has checkable deposits of $20 billion and excess reserves of $2 billion when the reserve ratio is 25 percent. If the reserve ratio is then lowered to 20 percent, we can conclude that the:

A.Banking system now has excess reserves of $3 billion
B.Monetary multiplier has decreased
C.Maximum money-creating potential of the banking system has been increased by $7 billion
D.Fed has decided that money supply is needed to be reduced

ANSWER:

A.Banking system now has excess reserves of $3 billion