Decreases in the fraction of deposits that banks hold as reserves increase interest rates and create a negative demand shock.

Name: Decreases in the fraction of deposits that banks hold as reserves increase interest rates and create a negative demand shock.
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Question

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If banks hold a lower fraction of deposits as reserves, it increases the money supply and can lead to lower interest rates. This would create a positive demand shock, not a negative one.

Decreases in the Fraction of Deposits That Banks Hold as Reserves