Question

If bank a borrows from bank b, reserves in the banking system __________. if bank a borrows from the fed, reserves in the banking system __________.

Answer 1

If Bank A borrows from Bank B, reserves in the banking system will remain unchanged. If Bank A borrows from the Fed, reserves in the banking system will rise.  If the Fed lowers the required reserve ratio, reserves in the banking system will remain unchanged but excess reserves will rise. This will probably lead to an increase in new loans, checkable deposit and in the money supply.