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

Lowering of the reserve ratio will reduce the amount of required reserves of the bank by $1 million, that is 5 per cent of $30 billion. This will add the amount to the excess reserves as the reduced reserves will be added to the excess reserves of the bank. Thus, reduction in the required reserves will increase the excess reserves of the bank and thus increase the amount of money supplied.