BANKING AFFAIRS

Detailed explanation-1: -The Federal Reserve can influence the Federal funds rate by buying or selling government bonds. When the Federal Reserve buys bonds, this action increases the supply of excess reserves of banks.

Detailed explanation-2: -Hence the power of the commercial banks to expand deposits through expanding their loans and advances is known as credit creation.

Detailed explanation-3: -Banks with excess reserves lend money to banks with a deficit in reserves. These loans are unsecured so banks only lend to banks they can trust. Usually, smaller banks have the excess reserves to lend while large banks in major metropolitan areas need to borrow.

Detailed explanation-4: -By raising the IOER rate, the central bank gives commercial banks more incentives to hold excess reserves, which reduces the money supply. To conduct an expansionary monetary policy, the central bank can lower the IOER rate. This will lead to commercial banks reducing their excess reserves.