Question

How would a decrease in the reserve requirement affect the (a) size of the money multiplier, (b) amount of excess reserves in the banking system, and (c) extent to which the system could expand the money supply through the creation of checkable deposits via loans?

Answer 1

Money multiplier is given by mm = (1 + currency deposit ratio)/(required reserve ratio + excess reserve deposit ratio + currency deposit ratio)

If there is a decrease in the Reserve Requirement, required reserve ratio in the denominator will decrease. This is going to increase the size of the multiplier

Because now more reserves are available for generation of loans this will increase the amount of excess reserves in the banking system

Commercial banking system is now more capable of expanding the money supply through the creation of checkable deposits by the generation of loans. This is because now it has more excess Reserves which can be used in advancing loans to borrowers.