Question

For a variety of reasons, a bank sometimes will hold more reserves than is legally required. These reserves are known as excess reserves. How does holding excess reserves affect the degree to which the money supply will change

Answer 1

Answer: D. The money supply will decrease as banks loan out less money.

Step-by-step explanation:

The money supply in the Economy is inversely related to the amount of reserves that a bank holds. This is because the higher the reserves held, the less the banks will have to borrow out and the less new money can be created from the money loaned out. Holding excess reserves therefore results in less money supply.