If the Board of Governors of the Federal Reserve System decreases the interest paid on excess reserves, the primary effect of this change is to:
A) encourage commercial bank lending of excess reserves and increase the money supply.
B) discourage commercial bank lending of excess reserves and increase the money supply.
C) decrease the excess reserves of member banks and thus decrease the money supply.
D) increase the excess reserves of member banks and thus increase the money supply.

Question

Quizplus · Accepted Answer

Decreasing the interest paid on excess reserves makes it less attractive for banks to hold onto these reserves, encouraging them to lend more, which increases the money supply.