In light of recent trends what can be done when the money cr

In light of recent trends, what can be done when the money created by the Federal Reserve tends to be used as excess reserves rather than for making loans?

Solution

Money supply will reduce if banks use excess money as excess reserves.

Change in money supply= (1/rr)*change in deposits.

1/rr is the multiplier

If central bank creates money, people deposit some percentage of created money in the banks. Banks then after keeping required reserves lend rest of the deposits with mulplier effect. Now if central bank holds excess reserves as well multiplier becomes 1/(rr+er)

where er is excess reserves.

The multiplier with excess reserves is lower than multiplier without excess reserves.

This is because less money is loaned out, which increases money supply by lower proportion.