Suppose banks decide to hold more excess reserves relative to deposits.Other things the same,this action will cause the
A)money supply to fall.To reduce the impact of this the Fed could sell Treasury bonds.
B)money supply to fall.To reduce the impact of this the Fed could buy Treasury bonds.
C)money supply to rise.To reduce the impact of this the Fed could sell Treasury bonds.
D)money supply to rise.To reduce the impact of this the Fed could buy Treasury bonds.

Question

Quizplus · Accepted Answer

When banks hold more excess reserves, the amount of money that can be created through the banking system decreases, leading to a contractionary effect on the money supply. To counteract this, the Fed can buy Treasury bonds in the open market, increasing the amount of money in circulation and offsetting the decrease in the money supply caused by the increased reserve holdings by banks. Therefore, choice B is the correct answer.

Suppose Banks Decide to Hold More Excess Reserves Relative to Deposits.Other