Big Bucks Bank currently holds $20 million in excess reserves. If the Fed increases the rate of interest it pays on excess reserves held at the Fed, we would expect Big Bucks Bank to

Question

Quizplus · Accepted Answer

If the Fed increases the rate of interest paid on excess reserves held at the Fed, Big Bucks Bank may prefer to hold more of those excess reserves in its reserve account at the Fed, as the interest earned on those reserves would be a risk-free profit. This would result in reducing the amount it is willing to lend, as it would have fewer excess reserves available to support its lending activities.

Big Bucks Bank Currently Holds $20 Million in Excess Reserves