Required Reserves during the Great Depression. During the Great Depression, banks held excess reserves because they were concerned depositors might be more inclined to withdraw funds from their...

Required Reserves during the Great Depression. During the Great Depression, banks held excess reserves because they were concerned depositors might be more inclined to withdraw funds from their accounts. At one point, the Fed became concerned that excess reserves were too high and raised the reserve requirements for banks.

a. Assuming banks were holding excess reserves for precautionary purposes, do you think they would continue to want to hold them even after reserve requirements were raised? Explain.

b. What do you think happened to the money supply after the Fed raised reserve requirements?