The correct option for the question regarding the impact of an increase in liquid reserve requirements by the central bank of Nigeria is A. a reduction in commercial banks' excess reserves. Explanation of the Correct Answer (A)

1. Understanding Liquid Reserve Requirements:
2. Liquid reserve requirements refer to the minimum amount of reserves that commercial banks must hold against their deposits. These reserves are typically held in the form of cash or deposits with the central bank. When the central bank increases these requirements, banks must hold a larger portion of their deposits as reserves.
3. Impact on Excess Reserves:
4. Excess reserves are the funds that banks hold over and above the required reserves. When the central bank raises the reserve requirement, banks must allocate more of their deposits to meet this new requirement. As a result, the amount of money that banks can lend out decreases, leading to a reduction in their excess reserves.
5. Mechanism of Change:
6. For example, if a bank has total deposits of 1 billion Naira and the reserve requirement is increased from 10% to 15%, the required reserves would increase from 100 million Naira to 150 million Naira. If the bank previously had 50 million Naira in excess reserves, it would now only have 0 million Naira in excess reserves after meeting the new requirement.

Why the Other Options are Incorrect

• B. More commercial bank loans to members of the public:
• This option is incorrect because an increase in reserve requirements means that banks have less money available to lend. With more funds tied up in reserves, banks will likely reduce the amount they lend to the public, not increase it.
• C. An increase in commercial banks' excess reserves:
• This option is incorrect because, as explained, an increase in reserve requirements leads to a decrease in excess reserves. Banks will have to hold more money in reserves, leaving them with less to lend or invest.
• D. No change in commercial banks' excess reserves:
• This option is also incorrect. An increase in reserve requirements directly affects the amount of money banks can hold as excess reserves. Since banks must now hold a larger portion of their deposits as reserves, there will be a clear change in the level of excess reserves.

Summary of Key Points

• An increase in liquid reserve requirements means banks must hold more reserves, reducing their excess reserves.
• Excess reserves are the funds available for lending after meeting reserve requirements.
• Higher reserve requirements typically lead to a decrease in the amount of money banks can lend to the public.
• Understanding the relationship between reserve requirements and excess reserves is crucial for grasping how central bank policies affect the banking system and the economy.

This thorough understanding of reserve requirements and their implications is essential for students preparing for professional exams in economics.