Question

10. Considering a recession may happen next year. Commercial banks are more conservative in their lending policies and start holding some excess reserves. Compared to a situation in which banks are not holding excess reserves, the size of the money supply will be A. depending on fiscal policy B. larger C. the same. D. smaller

Answer 1

10. The correct answer is 'Option C'.

It is given that commercial banks are holding more reserves than before. This means that the reserve ratio is increased. However, money supply depends on the kind of fiscal policy by the government. Since there is no such information given about the fiscal policy, it can be concluded that money supply being the same, the commercial banks are lending less money than they were lending earlier. So, 'Option C' is correct.

1. The correct answer is 'Option B'.

The amount of deposits is $10,000 and the reserve ratio is 5%. So, the commercial banks will lend 95% of the deposits and take out 5% as reserves. Therefore, $500 is in reserves and $9,500 is in loans. So, 'Option B' is correct.