Recall Application 1, "Avoiding a Liquidity Trap," to answer the following questions:
-What is the reason why the Fed started paying interest on bank reserves in 2008?
A) Paying interest on bank reserves increases money supply.
B) Paying interest on bank reserves places a floor on market interest rates.
C) Paying interest on bank reserves lowers the reserve requirement.
D) Paying interest on bank reserves increases bank profitability.

Question

Quizplus · Accepted Answer

Paying interest on bank reserves places a floor on market interest rates by providing banks with an alternative source of income on their excess reserves, allowing them to maintain higher levels of reserves without lending them out in the interbank market and driving down the federal funds rate.

Recall Application 1, "Avoiding a Liquidity Trap," to Answer the Following