The finding that bank loans decline and the volume of commercial paper issued increases when the Fed contracts the level of bank reserves appears to indicate that
A)the impact of contractionary monetary policy comes mainly from its effect on interest rates.
B)during these episodes borrowers who are able to do so switch toward nonbank sources of financing.
C)changes in credit demand must be responsible.
D)during these episodes savers must convert bank deposits into commercial paper purchases.

Question

Quizplus · Accepted Answer

When the Fed contracts the level of bank reserves, it becomes more difficult for banks to lend out money, so bank loans decline. However, the volume of commercial paper issued increases, indicating that borrowers are turning to nonbank sources of financing. This suggests that the impact of contractionary monetary policy comes not just from its effect on interest rates, but also from changes in the availability and accessibility of credit. Therefore, choice B is the best option.

The Finding That Bank Loans Decline and the Volume of Commercial