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Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the: b. money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds.
Excess reserve can be defined as the excess money set aside by banks or financial institutions and most of this banks tend to receives interest on the excess reserve they set aside.
Holding excess reserve relative to deposit can tend to cause money supply which is the amount of money in circulation to fall and to decrease the impact of it the Fed could buy Treasury bonds.
Therefore the correct option is B.
The missing options are:
a. money supply to fall. To reduce the impact of this the Fed could sell Treasury bonds.
b. money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds.
c. money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds.
d. money supply to rise. To reduce the impact of this the Fed could buy Treasury bonds.
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