If reserves held at the Fed by the private banks decrease,________.
A) banks will make more loans
B) bank deposits will decrease
C) demand for labor will increase
D) the nominal interest rate will decrease

Question

Quizplus · Accepted Answer

If reserves held at the Fed by the private banks decrease, bank deposits will decrease. This is because with fewer reserves, banks have less money to lend and may need to reduce the amount of deposits they hold. A decrease in bank deposits could also lead to a decrease in the money supply, which could put downward pressure on the economy and potentially lead to lower nominal interest rates. However, it is not necessarily true that banks will make more loans or that demand for labor will increase due to a decrease in reserves held at the Fed.

If Reserves Held at the Fed by the Private Banks