If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold:
A) More excess reserves
B) Less excess reserves
C) More required reserves
D) Less required reserves

Question

Quizplus · Accepted Answer

If the Fed reduces the interest paid on banks' reserves, it makes it less attractive for the banks to hold excess reserves. This means that the banks will want to lend out more money to earn higher returns, reducing the amount of excess reserves that they hold. Therefore, reducing the interest paid on reserves will make banks hold less excess reserves.

If the Fed Reduces the Interest Paid on Banks' Reserves