If the Fed Injects Additional Reserves into the Banking System

question 127

Multiple Choice

If the Fed injects additional reserves into the banking system, why will banks generally want to expand their loans and investments?

• A) Banks are legally required to expand loans when the Fed creates excess reserves.
• B) Maintaining reserves in excess of demand deposits is against the law.
• C) Banks fear the Fed will remove the excess reserves.
• D) Loans and investments generally earn more interest income for the banks than excess reserves.

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Definitions:

Workers

Individuals engaged in a task or activity for wages or salary.

Diminishing Marginal Product

The decrease in the additional output gained from using an extra unit of a production input, holding all other inputs constant, beyond a certain point.

Marginal Product

The supplementary yield that comes from the utilization of an extra unit of a given input, with all other inputs remaining fixed.

Number of Workers

The total count of individuals currently employed or available for employment in a specific labor market.