Recall the Application about the Fed's response to the collapse of the investment house Bear Stearns as well as its handling of the 2008 financial crisis with respect to other financial institutions to answer the following question(s).
-Recall the Application. In response to the financial crisis, the Fed implemented a new policy in which it began to pay interest on deposits held at the Fed. This move would ________ deposits held at the Fed and ________ the Fed's ability to make loans.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase

Question

Quizplus · Accepted Answer

Paying interest on deposits held at the Fed encourages banks to keep more reserves at the Fed, thereby increasing deposits. With more reserves, the Fed has greater capacity to control monetary policy and extend its lending capabilities, thus increasing its ability to make loans.

Recall the Application About the Fed's Response to the Collapse