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Why are banks excess reserves important if it would like to create money and how can...

Why are banks excess reserves important if it would like to create money and how can the FED help with the creation of the money?
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Answer #1

Excess reserve is excess money with bank after meeting all regulatory requirements. Excess reserve is either used for lending out or dealing with future uncertainties.

FED helps with the creation of the money by using different monetary policy tools. Federal fund rate can be used to create money supply. Fall in federal fund rate makes it cheaper to borrow from FED and borrowed amount is further used to create loans and advances. In this way, money supply would be created.

Through open market operation, FED can increase money supply. Buying securities from open market, would release money in open market which will increase capacity of lend out. Hence money supply is increased.

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