If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could
A) increase the interest rate paid on excess reserves encouraging banks to extend more loans.
B) decrease the interest rate paid on excess reserves encouraging banks to extend more loans.
C) decrease the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.
D) increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

Question

Quizplus · Accepted Answer

If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it would increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans. This is because when banks earn higher interest on their excess reserves, they have less incentive to lend out the money and thereby reduce the money supply. By increasing the interest rate paid on excess reserves, the Fed is effectively removing some of the excess reserves from the economy, leading to a decrease in the money supply.

If the Fed Wanted to Shift to a Restrictive Monetary