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Answer :
Final answer:
Excess reserves in banking are the amount by which a bank's actual reserves exceed its required reserves, and they play a key role in adjusting the M1 money supply through bank lending activities.
Explanation:
The question pertains to the concept of excess reserves in banking. Excess reserves refer to the funds that banks hold over and above the legally mandated reserve requirements set by the central bank. The correct answer to the student's question, which asks for the definition of excess reserves, is c. actual reserves minus desired reserves. When a bank's actual reserves exceed its desired or required reserves, the difference is known as the excess reserves.
This concept is vital to understanding how banks can influence the money supply through their lending activities. When banks have excess reserves, they have the capacity to create loans, which in turn can increase the total change in the M1 money supply. The calculation of the potential change in the money supply due to lending activities is therefore directly linked to the amount of excess reserves a bank holds.
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