Sia
Question
Statistics
Posted 8 months ago
If banks decide to keep fewer excess reserves and instead lend more, which of the following is the most likely effect?
Choose 1 answer:
(A) The nominal interest rate increases.
(B) The demand for money increases.
(C) The nominal interest rate decreases.
(D) The demand for money increases and the supply of money decreases.
(E) The demand for money decreases.
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Answer from Sia
Posted 8 months ago
Solution by Steps
step 1
When banks decide to keep fewer excess reserves and lend more, the supply of money in the economy increases
step 2
An increase in the supply of money typically leads to a decrease in the nominal interest rate because there is more money available for borrowing
step 3
With lower interest rates, the demand for money might increase as borrowing becomes cheaper
step 4
However, the most direct and likely effect is the decrease in the nominal interest rate due to the increased money supply
C
Key Concept
Effect of increased lending by banks on nominal interest rates
Explanation
When banks lend more, the money supply increases, leading to a decrease in nominal interest rates.
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