During a recession, when banks tend to increase their excess reserves, the money supply M1 decreases.

Question

Quizplus · Accepted Answer

When banks increase their excess reserves during a recession, they are holding onto more money and lending less, which decreases the money supply. M1 includes currency in circulation, demand deposits, and other checkable deposits, all of which can decrease during a recession as banks hold onto more reserves.

During a Recession, When Banks Tend to Increase Their Excess