Question

Banks deciding to hold less excess reserves for each $100 of deposit balances will

Select one:

a. Lower the money multiplier.

b. Increase the money supply.

c. Increase the purchasing power of money.

d. Lower the overall prices of consumer goods in the economy.

Answer 1

Solution:-Option C is correct

C.Increase the purchasing power of money.

Explaination:-Banks deciding to hold less excess reserves for each $100 of deposit balances will Increase the purchasing power of money.Bank A first changes a security for reserves, and then lends the reserves, creating loans. It receives $100 in reserves from the sale of securities. Since all of these reserve will be excess reserves (there was no change in checkable deposits), the bank will loan out all $100. The $100 will then be deposited into Bank B. This bank now has a change in reserves of $100, of which $90 is excess reserves.The Fed can increase the monetary base by purchasing government bonds and by extending discount loans.