Question

Question 43 Not yet Chapter 9 extensively discusses the role of the banking system in the economy, and specifically analyzes the impact of the multiple expansion of checkable deposits on the money supply. The key result of this analysis is that banks can "create money. What would happen to the size of M1 if banks decided to hold less money in excess reserves (ie. the desired holding of excess reserves falls)? Explain why M1 would behave in this way. Points out of 3.00 F Flag

Answer 1

When banks decide to hold less money in excess reserves, it means they will hold more money in required reserves and thus give out less loans. This will result in reduced checking accounts and transaction accounts being opened.

Since checking and transaction accounts are a part of the M1 money supply, it will lead to a fall in M1 measure of money supply and thus fall in money supply in the economy.