Suppose that banks decide to hold more excess reserves relative to deposits.Other things the same,this action will cause the
A)money supply to fall.To reduce the impact of this the Fed could lower the discount rate.
B)money supply to fall.To reduce the impact of this the Fed could raise the discount rate.
C)money supply to rise.To reduce the impact of this the Fed could lower the discount rate.
D)money supply to rise.To reduce the impact of this the Fed could raise the discount rate.

Question

Quizplus · Accepted Answer

When banks hold more excess reserves, it reduces their ability to lend and create deposits. As a result, the money supply falls. To counteract this, the Fed could lower the discount rate, which would encourage banks to borrow more reserves and increase their lending activity, offsetting the reduction in the money supply. Option B and D are incorrect because raising the discount rate would further discourage banks from borrowing reserves and lending, exacerbating the reduction in the money supply. Option C is incorrect because increasing the money supply would not be an appropriate response to banks holding more excess reserves.

Suppose That Banks Decide to Hold More Excess Reserves Relative