AP Macroeconomics Question 342: Answer and Explanation

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Question: 342

1. Excess reserves in the banking system will increase if

  • A. the reserve ratio is increased.
  • B. the checking deposits increase.
  • C. the discount rate is increased.
  • D. the Fed sells Treasury securities to commercial banks.
  • E. income tax rates increase.

Correct Answer: B


B-When more deposits are made, the bank increases required reserves by the fraction of the reserve ratio, and increased excess reserves are lent to borrowers to create more money.