Recall Application 2, "The Growth in Excess Reserves" to answer the following questions:
-Based on what you learned from the application, the Fed can increase incentives for banks to lend less and decrease the money supply by:

Question

Quizplus · Accepted Answer

Raising the interest rate for excess reserves would increase the opportunity cost of holding excess reserves, therefore, incentivizing banks to lend less and decrease the money supply. Lowering the reserve requirement would increase the amount of reserves banks are required to hold, which would incentivize banks to hold onto excess reserves and also decrease the money supply. Lowering the interest rate for excess reserves would decrease the opportunity cost of holding excess reserves, therefore, incentivizing banks to hold onto more excess reserves and potentially increase the money supply. Therefore, choices B and C would have the opposite effect of what is desired.

Recall Application 2, "The Growth in Excess Reserves" to Answer