Suppose that the economy of Bankrun requires that banks hold reserves equal to 1

Question

Suppose that the economy of Bankrun requires that banks hold reserves equal to 10 percent of their deposits. Currently banks cannot carn interest on their reserves. Because the central bank in the economy is worried aboutr fütüré financ panics, they are considering paying interest on these reserves. The economy-wide interest rate is 1 percent, and t rate offered on reserves is going to be 0.75 percent. Which of the following might occur Banks will make fe less risk. a. wer loans, because holding reserves has close to the same returns and carries Banks will make more loans because they will have more money and their is lower risk associated with the loans. b. c. The expected return of making loans is now higher, so banks will make more loans. d. None of the above

Explanation / Answer

As the banks will earn more by lending in the economy than they are earning by keeping the money in reserves. they will start lending more and earn an interest in the amount. this will increase the amount of loans made by the banks.  

The answer is "C".

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