Uncertainty and Banks: Impact on Excess Reserves

Uncertainty and Banks

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Question

Uncertainty may cause banks to hold larger excess reserves. Other things constant, this will

Answers

A. tend to reduce the money supply during a period of inflation and increase it during a recession.

B. tend to reduce the money supply.

C. tend to increase the money supply.

D. have no effect on the money supply.

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Explanations

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A. B. C. D.

The money supply is reduced when banks hold larger excess reserves through the work of the deposit expansion multiplier. Since banks extend fewer loans when they hold larger excess reserves, the money supply falls.

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