ECONOMICS
MONEY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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decrease in checking accounts
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decrease the amount of potential loans made by the bank
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increase the interest rate offered by the bank
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decrease the reserve ratio of the banking system
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Detailed explanation-1: -Excess reserves are a safety buffer of sorts. Financial firms that carry excess reserves have an extra measure of safety in the event of sudden loan loss or significant cash withdrawals by customers. This buffer increases the safety of the banking system, especially in times of economic uncertainty.
Detailed explanation-2: -If the Federal Reserve decides to lower the reserve ratio through an expansionary monetary policy, commercial banks are required to keep less cash on hand and are able to increase the number of loans to give consumers and businesses. This increases the money supply, economic growth and the rate of inflation.
Detailed explanation-3: -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-4: -Increasing the (reserve requirement) ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit.