The Fed's power to set the required reserves of commercial banks:
A) provides a certain source of interest income for commercial banks.
B) allows the Fed to control the lending ability of commercial banks and, thereby, control the money supply.
C) prevents banks from hoarding too much vault cash.
D) prevents commercial banks from earning excess profits.

Question

Quizplus · Accepted Answer

The Fed's power to set the required reserves of commercial banks allows it to control the lending ability of commercial banks, which in turn affects the money supply. By requiring banks to hold a certain percentage of deposits in reserve, the Fed can limit how much the bank can lend out and thus control the amount of money in circulation. This is a key tool in monetary policy. A, C, and D are not accurate descriptions of this power.

The Fed's Power to Set the Required Reserves of Commercial