As a result of an increase in the money supply, some banks may end up with excess reserves. What is the likely result?

Question

Quizplus · Accepted Answer

When banks have excess reserves, they have more money available to lend out. This leads to an increase in the money supply and more loans being made, which in turn increases aggregate demand. Therefore, choice A is the correct answer. Choice B is incorrect because more loans would actually contribute to an increase in aggregate demand, not a decrease. Choice C is incorrect because banks would not typically raise interest rates in response to having excess reserves. Choice D is incorrect because banks would not typically spend excess reserves by paying their employees more - they would normally use them to make more loans or invest in assets with higher returns.

As a Result of an Increase in the Money Supply