The Sharp Increase in the Excess Reserves Held by the Commercial

question 166

Multiple Choice

The sharp increase in the excess reserves held by the commercial banking system since the second half of 2008 increases the potential for

• A) a sharp contraction in the money supply, which is likely to increase the length and severity of the recession.
• B) a rapid increase in the money supply, potentially leading to inflation.
• C) a gradual increase in the money supply, following the trend of the previous decade.
• D) a reduction in the ability of banks to extend additional loans.

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Definitions:

After-Tax Discount Rate

The rate used to discount future cash flows to their present value after accounting for taxes.

Depreciation Tax Shield

A reduction in taxable income resulting from the allowance for depreciation expenses on assets.

Net Advantage

The benefit or advantage one entity has over competitive entities, often assessed in terms of efficiency, cost, or market position.

After-Tax Lease Payment

The lease payment amount after accounting for tax deductions or benefits.