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When the Federal Reserve reduces the reserve requirements from 20 percent to 15 percent, banks are required to hold less money in reserve. This means that they can lend out a larger portion of their deposits. The immediate effect of this change is an increase in excess reserves, which are the funds that banks have available for lending beyond the minimum reserve requirement.

As banks have more excess reserves, they can increase their lending activities. This additional lending contributes to an increase in the overall money supply in the economy, as more money is being circulated through loans to consumers and businesses.

This mechanism is a fundamental aspect of monetary policy, where adjustments to reserve requirements can lead to changes in the money supply. Thus, the correct answer indicates that a reduction in reserve requirements allows banks to increase their excess reserves and consequently increase the money supply.