Decreasing the excess reserves of financial depository institutions would:
A) increase the supply of loans and raise the interest rate.
B) increase the supply of loans and lower the interest rate.
C) decrease the supply of loans and raise the interest rate.
D) decrease the supply of loans and lower the interest rate.

Question

Quizplus · Accepted Answer

Decreasing the excess reserves of financial depository institutions limits their ability to create loans, thus decreasing the supply of loans. According to the law of supply and demand, a decrease in supply, with demand remaining constant, would lead to an increase in the price of loans, which is reflected in higher interest rates.

Decreasing the Excess Reserves of Financial Depository Institutions Would