The Fed can induce banks to increase their reserve holdings by

Question

Quizplus · Accepted Answer

By increasing the interest on reserves, the Fed provides an incentive for banks to hold more reserves, as they can earn a higher return on those reserves. This is an alternative to the traditional tool of increasing the required reserve ratio, which can be too disruptive to banks' lending operations. The other choices would likely have a different effect: increasing the discount rate would make borrowing from the Fed more expensive, reducing the required reserve ratio would free up funds for banks to lend, and selling securities in the open market would reduce banks' excess reserves.

The Fed Can Induce Banks to Increase Their Reserve Holdings