When bankers hold excess reserves:
A) The size of the monetary multiplier increases
B) The money-creating potential of the banking system increases
C) The money-creating potential of the banking system decreases
D) There is no change in the money-creating potential of the banking system

Question

Quizplus · Accepted Answer

Excess reserves are funds that banks hold above the required reserves. When banks hold excess reserves, they have less money to lend out. As a result, the money-creating potential of the banking system decreases. This is because the amount of loans that can be made is limited by the amount of excess reserves available. Therefore, choice C is the correct answer.

When Bankers Hold Excess Reserves