Interest paid on excess reserves held at the Fed
A) is available to the general public, but not to commercial banks.
B) will incentivize ﬁnancial institutions to hold more reserves and reduce risky lending.
C) is determined by the federal funds rate.
D) totaled over $1 trillion in 2018.

Question

Quizplus · Accepted Answer

Interest paid on excess reserves held at the Fed will incentivize financial institutions to hold more reserves and reduce risky lending. This is because if the interest rate paid on excess reserves is higher than the rate at which banks can lend out those reserves, it makes more sense for the banks to hold on to the excess reserves rather than loan them out. In turn, this reduces the amount of risky lending and can help stabilize the financial system.

Interest Paid on Excess Reserves Held at the Fed