When bankers hold excess reserves,
A) the size of the monetary multiplier increases.
B) the money-creating potential of the banking system increases.
C) the money-creating potential of the banking system decreases.
D) there is no change in the money-creating potential of the banking system.

Question

Quizplus · Accepted Answer

Excess reserves are reserves held by banks in excess of the required reserve ratio. When banks hold excess reserves, their ability to create new loans and therefore, new money, is reduced as they have less funds available for lending. This decreases the money-creating potential of the banking system.

When Bankers Hold Excess Reserves