Explain how your answers to Test Yourself Question 5 would differ if banks decided to hold onto the $5 billion in new reserves as excess reserves.

Data From Test Yourself Question 5 

Explain what a $5 billion increase in bank reserves will do to real GDP under the following assumptions:

a. Each $1 billion increase in bank reserves reduces the rate of interest by 0.5 percentage point.

b. Each 1 percentage point decline in interest rates stimulates $30 billion worth of new investment.

c. The expenditure multiplier is two.

d. The aggregate supply curve is so flat that prices do not rise noticeably when demand increases.