If banks are currently holding zero excess reserves and the Fed lowers the required reserves ratio, which of the following will happen?Group of answer choicesBanks will have a reserve deficiency.Banks will have positive excess reserves.Banks will extend fewer loans.Banks will call in some of their loans to meet the reserve deficiency.
Question
If banks are currently holding zero excess reserves and the Fed lowers the required reserves ratio, which of the following will happen?Group of answer choicesBanks will have a reserve deficiency.Banks will have positive excess reserves.Banks will extend fewer loans.Banks will call in some of their loans to meet the reserve deficiency.
Solution
If the Federal Reserve lowers the required reserve ratio, banks will have positive excess reserves. Here's why:
-
The required reserve ratio is the minimum amount of reserves a bank is required to hold against deposits.
-
If the Federal Reserve lowers this ratio, it means that banks are required to hold less money in reserve.
-
This means that the money that was previously held in reserve to meet the old, higher ratio is now considered excess reserves.
-
Banks can use these excess reserves to extend more loans, which can stimulate economic activity.
So, the correct answer is: Banks will have positive excess reserves.
Similar Questions
The actual change in the money supply as a result of an increase in excess reserves will be less than the maximum change if banksGroup of answer choicesdo not lend out all of their excess reservesborrow from the Federal Reservesell some of their government securities to the Federal Reservelend only their excess reserves
Suppose a bank has $10,000 in deposits and $1,000 in reserves. The required reserve ratio is 5%. Which of the following occurs if the required reserve ratio is increased to 10%?Question 48Select one:a.The bank's required reserves will decrease to $500.b.The bank's excess reserves will increase to $1,000.c.The bank's required reserves will increase to $1,000.d.The bank's ability to create loans increases by 5%.
When the Reserve Bank sells government securities, the banks'Group of answer choicesreserves will decrease and lending will contract, causing a decrease in the money supply.reserves/deposit ratio will increase and lending will expand, causing an increase in the money supply.reserves will increase and lending will expand, causing an increase in the money supply.reserves will increase and lending will contract, causing no change in the money supply.reserve requirements will increase and lending will contract, causing a decrease in the money supply.
The problem of banks choosing to hold excess reserves does not affect __________ .Select the correct answer below:contractionary monetary policyexpansionary fiscal policycontractionary fiscal policyexpansionary monetary policy
Which of the following are true under a 100 percent reserve requirement scenario?(Select all that apply)SELECT ALL THAT APPLYIt would allow the banks to make greater loans and would increase bank profits.The demand for loans would be supplied by more unregulated institutions, and they might beriskier than the current fractional-reserve banks.It would lower bank profits, which weakens rather than strengthens the banks.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.