Excess reserves are put to use by a bank when it
A)puts cash in the vault to back existing loans.
B)pays off the mortgage on its building.
C)sells government securities.
D)makes loans to its customers.

Question

Quizplus · Accepted Answer

Excess reserves are a source of funds that banks can use to make loans to their customers. By doing so, they can earn interest on the loans and increase their profits. Option A is incorrect because putting cash in the vault to back existing loans would not require excess reserves, as the bank would already have sufficient reserves to cover those loans. Option B is incorrect because paying off the mortgage on its building does not involve the use of excess reserves. Option C is incorrect because selling government securities would decrease a bank's reserves, including excess reserves.

Excess Reserves Are Put to Use by a Bank When