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 lower the discount rate.
B)money supply to fall.To reduce the impact of this the Fed could raise the discount rate.
C)money supply to rise.To reduce the impact of this the Fed could lower the discount rate.
D)money supply to rise.To reduce the impact of this the Fed could raise the discount rate.

Question

Quizplus · Accepted Answer

If banks decide to hold more excess reserves relative to deposits, this reduces the amount of money available for lending and hence the money supply falls. To counteract this, the Fed could lower the discount rate to encourage banks to borrow more from the Fed, which in turn would increase their reserves and potentially increase lending. Option B is incorrect because raising the discount rate would discourage banks from borrowing from the Fed, which would have the opposite effect of reducing their reserves and potentially reducing lending even further. Options C and D are also incorrect because increasing the money supply in this scenario would exacerbate the problem of banks holding too many excess reserves.

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