ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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If the FED increased the interest rate on required and excess reserves
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If Congress cut taxes on corporations
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If the FED decreased the interest rate on required and excess reserves
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Economics is the best
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Detailed explanation-1: -The excess reserve is any cash over the required minimum that the bank is holding in its vault rather than lending out to businesses and consumers. Banks have little incentive to maintain excess reserves because cash earns no return and may even lose value over time due to inflation.
Detailed explanation-2: -Excess reserves allow expansion of the money supply This is the bank’s excess reserves-the extra money beyond what they must keep in required reserves. The bank can do one of two things with that money: Keep it in the bank (just in case you want to withdraw more than $20 ) Loan it out.
Detailed explanation-3: -Raising the reserve requirement reduces the amount of money that banks have available to lend. Since the supply of money is lower, banks can charge more to lend it. That sends interest rates up. Changing the requirement is expensive for banks.