Assume that banks become more conservative in their lending policies and start holding some excess reserves. Compared to a situation in which banks are not holding excess reserves, the size of the money supply will be

Question

Quizplus · Accepted Answer

If banks begin holding excess reserves, then they have less money to loan out to borrowers. This means that the money supply in the economy will decrease since there is less money available for spending and investment. Therefore, the size of the money supply will be smaller in this scenario.

Assume That Banks Become More Conservative in Their Lending Policies