Assume that commercial banks are holding excess reserves because business firms and consumers are not willing to borrow money A decrease in the discount rate is likely to ?
Correct answer: C. Not change the money supply because banks already have excess reserves they cannot lend
- A. increase the money supply because it is now cheaper for banks to borrow from the central bank
- B. decrease the money supply because it will now be more expensive for business firms and consumers to borrow money
- C. Not change the money supply because banks already have excess reserves they cannot lend
- D. Decrease the money supply because it is now cheaper for banks to borrow from the central bank instead instead of buying government securities
Explanation
With excess reserves already available and no willingness by firms or consumers to borrow, cheaper central-bank credit does not create additional lending or deposits. The money supply therefore remains unchanged in this situation.
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