What effect does lowering the reserve ratio have on a bank's required reserves?

Lowering the reserve ratio directly decreases the amount of required reserves that a bank must hold against its deposits. The reserve ratio is the fraction of deposits that banks are legally required to keep on hand as reserves. When this ratio is lowered, banks are allowed to retain less of their deposits as reserve funds, which effectively decreases the required reserves.

As banks have more excess reserves (the funds they hold in excess of the required minimum), they are able to lend out a larger portion of their deposits. This increase in lending typically leads to a growth in the money supply because the act of lending creates new deposits in the banking system. Therefore, by lowering the reserve ratio, the banking system can create more money through the lending process, consequently increasing the money supply.

In summary, lowering the reserve ratio decreases required reserves since banks must hold less in reserve, while simultaneously increasing the overall money supply due to the potential for greater lending.