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Banks pay a slightly higher interest rate on savings if the account holder used their ATM...

Banks pay a slightly higher interest rate on savings if the account holder used their ATM card more often per month and reduced amount of cash carried in their wallet. How will this policy affect the ability of the bank to create loans?

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Answer #1

If account holder use his or her ATM card more often for transaction than cash and thus carries less cash in his or her wallet then in that case account holder will keep more money in his or her account.

This kind of behavior on part of customers of a bank will increase the amount of checkable deposits with the bank.

This increase in checkable deposits will increase the amount of excess reserves with the bank.

Bank, in general, lends the amount equivalent to excess reserves it held.

So, increase in quantum of excess reserves will increase the amount of loans that bank makes.

Thus,

This policy will increase the ability of the bank to create loan.

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