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 started paying interest to banks on reserves. All else equal, this would tend to ________ on a bank's balance sheet.
A) increase loans
B) increase deposits
C) increase reserves
D) all of the above

Question

Quizplus · Accepted Answer

The Fed's decision to pay interest on reserves would tend to increase a bank's reserves, as banks would have an incentive to hold on to excess reserves rather than loan them out due to the interest they could earn from the Fed. It would not necessarily increase loans or deposits, as those decisions are based on a variety of factors beyond just the interest rate on reserves.

Recall the Application About the Fed Increasing Bank Reserves During