Which of the following is the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?
A) A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employment.
B) A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment.
C) The money supply is decreased, which increases the interest rate and causes investment spending, output, and employment to decrease.
D) The money supply is increased, which decreases the interest rate and causes investment spending, output, and employment to increase.

Question

Quizplus · Accepted Answer

When monetary authorities increase the size of commercial banks' excess reserves, the money supply is increased, which decreases the interest rate and causes investment spending, output, and employment to increase. This is because banks have more reserves available to lend out, which leads to an increase in borrowing and spending. As a result, interest rates go down and the economy grows.

Which of the Following Is the Most Accurate Description of Events