Question

During he Great Depression , banks held excess reserves because they were concerned that depositors might be more inclined to withdraw funds from their accounts. At one point, the fed became concerned about the "excess" reserves and raised the reserve requirement for banks.

Assuming that banks were holding excess reserves for precautionary purposes, would they continue to hold excess reserves even after reserve requirements were raised?

A) yes

B) no

After the Fed raised the reserve requirement, the money supply would

Answer 1

B) The answer is NO

If the FED raises the reserve requirement for the banks then the banks are bound to maintain the reserves according to the increased rates specified by the FED. Now once this requirement is met the banks can lend the remaining excess reserves in the market.

After the FED raises the reserve requirement the Money Supply in the economy should fall. But in case the excess reserves net of the increased reserve requirement is high and the banks decide to lend this excess reserves then money supply may increase.