A decrease in excess reserves would cause:
A) a decrease in the interest rate and the quantity of loans made.
B) an increase in the interest rate and the quantity of loans made.
C) a decrease in the interest rate and an increase in the quantity of loans made.
D) an increase in the interest rate and a decrease in the quantity of loans made.

Question

Quizplus · Accepted Answer

A decrease in excess reserves means banks have less money available to lend out. This scarcity of available funds leads to an increase in the interest rate as banks charge more for loans. Consequently, the quantity of loans made decreases because higher interest rates make borrowing more expensive for consumers and businesses.

A Decrease in Excess Reserves Would Cause