Which of the following is the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?

A. A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employment

B. A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment

C. The money supply is decreased, which increases the interest rate, and causes investment spending, output, and employment to decrease

D. The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase

Question

Wade Knight

Business

7 February, 04:44

Which of the following is the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?

A. A fall in interest rates decreases the money supply, causing an increase in investment spending, output, and employment

B. A rise in interest rates increases the money supply, causing a decrease in investment spending, output, and employment

C. The money supply is decreased, which increases the interest rate, and causes investment spending, output, and employment to decrease

D. The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase

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Answers (1)

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Ruchus · Answer 1

Answer: Option (D) is correct.

Explanation:

From the given option, the most precise characterization of events when reserve banks or monetary authorities increase the size of excess reserves of an commercial bank is given by option (D).

Once there is an increase in the size of commercial banks' excess reserves, this will further lead to increase in the money supplied in an economy which will further decrease the interest rate and therefore will cause investment spending, output produced and employment to increase.