When a bank lends excess reserves to a customer:

Question

Quizplus · Accepted Answer

When a bank lends excess reserves to a customer, it increases the amount of money circulating in the economy, thereby increasing the money supply. This is because the lent amount is deposited in the customer's account, which becomes part of the demand deposits that make up the money supply. Therefore, choice (B) is the best answer. Option (A) is incorrect as lending excess reserves does impact the money supply. Option (C) is incorrect as lending decreases the money supply. Option (D) is also incorrect as writing a check to another customer at another bank does not involve excess reserves and does not have the same effect as lending reserves.

When a Bank Lends Excess Reserves to a Customer