Question

When a bank receives additional deposits from depositors, Ceteris paribus, it's required reserves in excess reserves both ________?

a) decrease

b) increase

c) stay the same

d) none of the above

Answer 1

Required reserve is the amount of money bank keep with themselves while lending the excess reserves. They have a fixed proportion of additional deposit which they keep it with themselves for emergency purposes and lend rest.

As deposits in the bank rises, their required reserves will fall because once they reach their level where they have enough money for unfortune moments, they will start lending all of the money available with them. It will decrease required reserve.

Option A is correct.