If a number of people suddenly deposit into their checking accounts a great deal of cash previously kept in their pockets or at home, other things constant, their actions will
A) create excess reserves and place banks in a position to extend additional loans, which will reduce the money supply.
B) create excess reserves and place banks in a position to extend additional loans, which will expand the money supply.
C) lead to higher interest rates.
D) force the Fed to reduce its discount rate.

Question

Quizplus · Accepted Answer

When individuals deposit cash into their checking accounts, this increases the amount of reserves banks have available. With more reserves, banks can extend additional loans, which leads to an expansion of the money supply. Therefore, the correct answer is B.

If a Number of People Suddenly Deposit into Their Checking