# Demand deposits higher required reserves higher

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Chapter 24 / Exercise 35
Exploring Economics
Sexton
Expert Verified
Demand deposits higherRequired reserves higherExcess reserves lowerd.Demand deposits higherRequired reserves higherExcess reserves lower
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Chapter 24 / Exercise 35
Exploring Economics
Sexton
Expert Verified
e.Demand deposits higherRequired reserves higherExcess reserves lowerThese three questions illustrate that from the viewpoint of the banking system, it does not matter if the banks acquire debt issued by firms, governments, or households. To acquire the debt, the banks must have excess reserves. After they have used their excess reserves, the money supply is expanded, and the excess reserves become required reserves.f.Demand deposits no changeRequired reserves no changeExcess reserves no changeUnlike in the previous questions, the lending of excess reserves from one bank to another does not in the aggregate increase or decrease the reserves of the banking system.g.Demand deposits no changeRequired reserves no changeExcess reserves no changeLoans between members of the non-bank general public do not affect banks' reserves and thus do not affect their capacity to lend.h.Demand deposits lowerRequired reserves lowerExcess reserves higherWhile the creation of new loans uses the banks' excess reserves and creates new money, the retiring of loans from commercial banks reduces demand deposits and restores excess reserves (i.e., increases excess reserves).i.Demand deposits higherRequired reserves higherExcess reserves higherj.Demand deposits no changeRequired reserves no changeExcess reserves lowerk.Demand deposits no changeRequired reserves higherExcess reserves lowerQuestions j and k illustrate two major monetary tools, the reserve requirement and the discount rate. Notice that changing the discount rate and the reserve requirements do not in themselves change demand deposits. Their impact is on reserves, and the effect of this impact may lead to a change in the supply of money.l.Demand deposits higherRequired reserves higher
Excess reserves lowerm.Demand deposits no changeRequired reserves no changeExcess reserves no changen.Demand deposits increaseRequired reserves increaseExcess reserves increaseDuring a period of inflation, a policy that contracts the money supply and the capacity of banks to lendis desirable. The opposite situation would apply during a recession. If there were a deficit during a period of recession, it is desirable to increase the money supply and the capacity of the banks to lend. Hence n is better than m.
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