Question

If the Fed injects reserves into the banking system and they are held as excess reserves (i.e. not used for loans at all), then the monetary base ________ and the money supply ________. A) remains unchanged; remains unchanged B) remains unchanged; increases C) increases; increases D) increases; remains unchanged

Answer 1

Answer

Option D

D) increases; remains unchanged

The monetary base includes reserves and money supply does not as the reserves increases and there is no change in lending so there is no change in the deposits so there is no change in the money supply.

Answer 2

The correct answer is D) increases; remains unchanged.

When the Federal Reserve (Fed) injects reserves into the banking system and those reserves are held as excess reserves, it means that the banks choose not to use those reserves for loans or other lending activities. In this scenario, the monetary base increases because the reserves injected by the Fed add to the total reserves held by the banking system.

However, since the excess reserves are not being utilized for lending, they do not enter into the money creation process. Therefore, the money supply remains unchanged. The money supply is influenced by various factors, including the lending and deposit creation activities of banks, but in this case, with the excess reserves being held and not used, the money supply does not increase.

So, when reserves are injected into the banking system and held as excess reserves, the monetary base increases while the money supply remains unchanged.