The sharp increase in the excess reserves held by the commercial banking system since the second half of 2008 increases the potential for
A) a sharp contraction in the money supply, which is likely to increase the length and severity of the recession.
B) a rapid increase in the money supply, potentially leading to inflation.
C) a gradual increase in the money supply, following the trend of the previous decade.
D) a reduction in the ability of banks to extend additional loans.

Question

Quizplus · Accepted Answer

Excess reserves provide banks with the ability to create more loans, which can rapidly increase the money supply and potentially lead to inflation if not managed properly.

The Sharp Increase in the Excess Reserves Held by the Commercial