The large increase in the excess reserves held by the commercial banking system during the second half of 2008,
A) increases the likelihood of a sharp contraction in the money supply, which would increase the length and severity of the recession.
B) increases the likelihood of a rapid increase in the money supply, potentially leading to future inflation.
C) is merely a continuation of the trend present since 1990.
D) reduces the ability of banks to extend additional loans.

Question

Quizplus · Accepted Answer

The large increase in excess reserves held by the commercial banking system during the second half of 2008 increases the likelihood of a rapid increase in the money supply, potentially leading to future inflation. This is because excess reserves can be used to make loans or buy securities, increasing the money supply.

The Large Increase in the Excess Reserves Held by the Commercial