During a recession, profit-oriented banks would be prone to reduce the money supply by increasing their excess reserves and declining to lend to less creditworthy applicants.

Question

Quizplus · Accepted Answer

During a recession, profit-oriented banks tend to lower their lending due to the higher risks involved. This leads to a decrease in the money supply, which can exacerbate the recession. Therefore, banks tend to increase their excess reserves during such times to safeguard against the risk of default by their borrowers.

During a Recession, Profit-Oriented Banks Would Be Prone to Reduce