An increase in excess reserves when the economy is at less than full employment tends to cause the interest rate to:
A) increase, which causes an increase in spending, output, and employment.
B) increase, which causes a decrease in spending, output, and employment.
C) decrease, which causes an increase in spending, output, and employment.
D) decrease, which causes a decrease in spending, output, and employment.

Question

Quizplus · Accepted Answer

An increase in excess reserves typically leads to lower interest rates as banks have more funds to lend. Lower interest rates make borrowing cheaper, encouraging spending and investment, which in turn can lead to increases in output and employment, especially when the economy is not at full employment.

An Increase in Excess Reserves When the Economy Is at Less