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) conduct massive open market purchase.

Question

Quizplus · Accepted Answer

When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, the best choice is to increase the interest rate paid on excess reserves. This makes it more expensive for banks to hold onto their excess reserves and provides an incentive for them to lend out the money instead. Increasing the discount rate or conducting massive open market purchases are not as effective in this scenario.

When the Fed Wants to Raise Interest Rates After Banks