AP Macroeconomics Question 342: Answer and Explanation
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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.