What is the problem if the Banks hold excess reserves?
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1. Why do banks want to maintain as few excess reserves as possible?
2. Under what circustances mght banks desire to hold excess reserves?
I am confused about the federal funds rate. Does lowering the federal funds rate result in QE? It seems like, lowered federal funds rate -> opportunity cost for holding excess reserves by banks decrease -> banks hold more excess reserves -> money multiplier decrease -> money supply decreases and the decrease in the money supply is not QE. Can anyone please help me with what is wrong with this logic? Thanks.
Someone just answered opportunity cost for holding excess reserves by banks decrease -> banks hold less excess reserves.
But why? Why does a decrease in opportunity cost lead to less holding excess reserves? That answer didn't make sense to me.
The amount of deposits that banks must hold in reserve is
A) excess reserves.
B) required reserves.
C) total reserves.
D) vault cash.