When a bank accepts a checkable deposit from a customer, its deposits will increase and its excess reserves will
A) increase by the same amount as deposits.
B) increase by less than the deposits.
C) increase by more than the deposits.
D) decrease.

Question

Quizplus · Accepted Answer

When a bank accepts a checkable deposit from a customer, its deposits will increase by the amount of the deposit. However, the bank must also meet reserve requirements set by the Federal Reserve, so it will hold a portion of the deposit as reserves. The remaining portion of the deposit, known as excess reserves, can be loaned out to other customers. Therefore, while deposits increase, excess reserves increase by less than the amount of the deposit.

When a Bank Accepts a Checkable Deposit from a Customer