ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The bank will keep some of it on hand as required reserves, but it will loan the excess reserves out. When that loan is made, it increases the money supply. This is how banks “create” money and increase the money supply. When a bank makes loans out of excess reserves, the money supply increases.

Detailed explanation-2: -The Fed has created trillions of dollars of excess reserves to the account of member banks. One frequently reads that the banks are not lending out those reserves, which is bad for the economy. But banks cannot lend out reserves. Only the Fed can create or destroy reserves.

Detailed explanation-3: -As described above, a bank holding excess reserves in such an environment will seek to lend out those reserves at any positive interest rate, and this additional lending will decrease the short-term interest rate.

Detailed explanation-4: -increases banks’ reserves and makes possible an increase in the money supply. A bank can lend out its excess reserves but not its required reserves. The required reserve ratio is required reserves stated as a percentage of the money supply.

Detailed explanation-5: -Excess reserves plus required reserves equal total reserves. Because banks earn relatively little interest on their reserves held on deposit with the Federal Reserve, we shall assume that they seek to hold no excess reserves. When a bank’s excess reserves equal zero, it is loaned up.