If the Fed wants to reduce banks' reserves, it can
A)buy securities in the open market.
B)lower the reserve ratio.
C)lower the federal funds rate.
D)raise the discount rate.

Question

Quizplus · Accepted Answer

If the Fed wants to reduce banks' reserves, it can raise the discount rate, which is the interest rate at which banks can borrow money from the Fed. By raising this rate, the cost of borrowing for banks increases, which may lead them to hold fewer reserves. Buying securities in the open market or lowering the reserve ratio would increase banks' reserves, while lowering the federal funds rate would encourage banks to lend, which may lead to an increase in reserves.

If the Fed Wants to Reduce Banks' Reserves, It Can