Which of the following correctly indicates how the Fed could use the interest rate it pays commercial banks on their excess reserves to influence the money supply?
A)If the Fed wanted to increase the money supply,it could increase the interest rate it pays banks on their excess reserves.
B)When the Fed reduces the interest rate paid on excess reserves,it increases the incentive of commercial banks to hold excess reserves.
C)If the Fed wanted to decrease the money supply,it could increase the interest rate paid on excess reserves.
D)When the Fed increases the interest rate it pays on excess reserves,this encourages banks to extend more loans and thereby increase the money supply.

Question

Quizplus · Accepted Answer

Increasing the interest rate paid on excess reserves encourages banks to hold more reserves rather than lending them out, which decreases the money supply.

Which of the Following Correctly Indicates How the Fed Could