Economics · Money and Banking
If a commercial bank chooses to purchase government securities rather than extend loans with its excess reserves, how does it affect the expansion of deposits in the banking system?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The expansion of deposits in the banking system will be completely eliminated
- 2The effect on deposits will be the same as if the bank had extended loans✓
- 3The effect on deposits will be the same as if the bank had held back its excess reserves in vault cash
- 4The expansion of deposits in the banking system will be dampened
Correct answer
The effect on deposits will be the same as if the bank had extended loans
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