When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves,it would
A)increase the interest rate paid on excess reserves.
B)increase discount rate.
C)increase the required reserve ratio.
D)conduct massive open market purchase.

Question

Quizplus · Accepted Answer

When banks have accumulated large amounts of excess reserves, they may not lend out all of the money they have in reserves since this could make them vulnerable if too many borrowers default on their loans. To counter this, the Fed might want to raise interest rates to incentivize banks to lend out their reserves. To do this, the Fed can increase the interest rate paid on excess reserves, which would make it more attractive for banks to keep their money in reserves with the Fed rather than lending it out. Therefore, the best choice is A: Increase the interest rate paid on excess reserves.

When the Fed Wants to Raise Interest Rates After Banks