An expansionary monetary policy may be more effective than a restrictive monetary policy because chartered banks may decide to hold a large quantity of excess reserves.

Question

Quizplus · Accepted Answer

A restrictive monetary policy typically involves increasing interest rates which will discourage banks from holding excess reserves and encourage them to lend out more money, while an expansionary monetary policy involves decreasing interest rates which will encourage banks to lend out more money and hold fewer excess reserves. Therefore, an expansionary monetary policy may not be more effective than a restrictive monetary policy if banks decide to hold onto their excess reserves regardless of the policy.

An Expansionary Monetary Policy May Be More Effective Than a Restrictive