If the Federal Reserve is currently paying 1 percent interest on bank reserves, but then reduces that interest rate to 0.5 percent, banks may decide to hold ________ reserves, and the money supply may ________.

Question

Quizplus · Accepted Answer

If the Federal Reserve lowers the interest rate it pays on bank reserves, then commercial banks will most likely hold fewer reserves at the Fed. This allows freed-up reserves to be lent out, which increases the money supply.

If the Federal Reserve Is Currently Paying 1 Percent Interest