If a bank becomes worried about the future, it may decide to increase the level of excess reserves it holds in hopes of avoiding a trip to the Fed's discount window.
a. If a large number of banks increase their excess reserve ratio, or the share of total deposits held in excess reserve, what effect will this have on the money supply? Explain your answer.
b. If a large number of banks decrease their excess reserve ratio, what effect will this have on the money supply? Explain your answer.
c. Explain why bank runs are a particularly important problem under fractional reserve systems and the role that the FDIC plays in preventing them.