Recall the Application about the Fed increasing bank reserves during the financial crisis in 2008 to answer the following question(s). During the height of the financial crisis in September 2008, The Fed injected large amounts of reserves into banks, and in the next month, they started paying interest to banks on these reserves. Prior to this time, banks earned no interest on either required or excess reserves.
-According to this Application, the Fed injected large amounts of reserves into banks during the 2008 financial crisis. The Fed needs to make sure that, in the long run, banks do not loan out too many of these reserves or the result will be
A) higher inflation.
B) higher interest rates.
C) additional unemployment.
D) a smaller money multiplier.

Question

Quizplus · Accepted Answer

Paying interest on reserves incentivizes banks to hold onto these reserves rather than loaning them out. If banks were to loan out too many of these reserves, it would increase the money supply significantly, leading to higher inflation in the long run.

Recall the Application About the Fed Increasing Bank Reserves During