For a variety of reasons, a bank sometimes will hold more reserves than is legally required. These reserves are known as excess reserves. How does holding excess reserves affect the money supply?

Decrease in supply of money in the economy

Explanation:

When bank holding excess reserves, then it would affect the money supply in a way that it decrease or reduce the money supply as the bank loan out less amount of money.

Bank lends their deposits which lead to increase the money supply in the market or economy. But when the bank hold more amount of money with themselves and lend less amount of money, it will lead to decrease in the money supply in the economy.