Explain What Excess Reserves Are

question 106

Essay

Explain what excess reserves are.Why do banks face a disincentive to hold a significant amount of excess reserves?

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Definitions:

Crowding Out

The phenomenon where increased government spending leads to a reduction in private sector investment or spending due to higher interest rates or competition for resources.

Discretionary Fiscal Policy

It involves government policy changes in taxation and spending designed to influence economic activity, typically to counteract inflation or deflation and stabilize the economy.

Nominal Output

The total value of goods and services produced by an economy, measured in current prices without adjusting for inflation.

Interest Rate

The cost of borrowing money, typically expressed as a percentage of the amount borrowed.