When the legal reserve requirement is lowered:
A. The money multiplier decreases, and the amount of excess reserves temporarily decreases in the bank system
B. The money multiplier increases, and the amount of excess reserves temporarily decreases in the banking system
C. There is no change in either the money multiplier or the amount of excess reserves in the banking system
D. The money multiplier increases, and the amount of excess reserves temporarily increases in the banking system
E. The money multiplier decreases, and the amount of excess reserves temporarily increases in the bank system
B. The money multiplier increases, and the amount of excess reserves temporarily decreases in the banking system
When the legal reserve requirement is lowered, banks are required to hold less reserves against their deposits. This allows them to lend out more of their deposits, increasing the money supply in the economy. As a result, the money multiplier increases, leading to a temporary decrease in the amount of excess reserves in the banking system as banks lend out more money.