(Consider This)The Fed is like a sponge in that it can:

Question

Quizplus · Accepted Answer

The Fed has the power to inject new reserves into the banking system when it wants to stimulate the economy, or soak up existing reserves when it wants to curb inflation. This is often referred to as "mopping up" excess reserves or "adding liquidity" to the system. So, like a sponge, it can absorb or release reserves as needed. However, the other choices are not accurate descriptions of the Fed's actions or capabilities.

(Consider This)The Fed Is Like a Sponge in That It