If the Federal Reserve is currently paying 0.75% interest on bank reserves, but then increases that interest rate to 1%, banks may decide to hold ______ reserves, and the money supply may _____.
A)more; increase
B)more; decrease
C)fewer; increase
D)fewer; decrease

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the interest rate on reserves, banks are incentivized to hold more reserves because they earn more interest. As a result, they may lend out less money, leading to a decrease in the money supply.

If the Federal Reserve Is Currently Paying 0