Question

Suppose bank a borrows reserves from bank b. now that bank a has more reserves than it previously had, will the money supply change?

O Yes, as long as the Fed allows one bank to borrow from another bank, the money supply will increase.
O Yes, whenever reserves move from one bank to another bank at the Fed, the money supply will increase.
O No, because the money supply can only change when new money is printed.
O No, because there are no new reserves in the banking system. One bank now has more reserves and another has fewer, but there has not been an injection of new reserves to increase the money supply.

Answer 1

The money supply does not change when Bank A borrows reserves from Bank B, as it is only a redistribution of existing reserves without an injection of new reserves into the banking system. The correct answer is option 4.

Step-by-step explanation:

When Bank A borrows reserves from Bank B, there is no overall increase in the money supply because the transaction only redistributes the existing reserves between banks. The borrowed reserves give Bank A more lending capacity, but since the reserves have been reduced correspondingly at Bank B, the aggregate capacity for lending within the banking system remains unchanged. The money multiplier effect, which influences the money supply, is dependent upon banks lending out their excess reserves, thereby increasing the quantity of loans and deposits throughout the banking system. However, in this case, there were no new reserves added to the banking system; it was simply a transfer from one bank to another. Therefore, the correct response is 'No, because there are no new reserves in the banking system. One bank now has more reserves and another has fewer, but there has not been an injection of new reserves to increase the money supply.'