When banks hold a large amount of excess reserves, which of the following tools would the Fed most likely use when it wants to increase the interest rate?

Question

Quizplus · Accepted Answer

If banks hold a large amount of excess reserves, it means they are not lending as much money as the Fed would like. To increase the interest rate in this situation, the Fed would likely use the tool of raising the interest rate it pays to banks on their reserves. This would incentivize banks to hold on to their excess reserves instead of lending them out, which would decrease the supply of money in circulation and ultimately increase interest rates. Option A, raising the reserve requirement, would also decrease the supply of money in circulation, but it may not be effective if banks already have a large amount of excess reserves. Option C, raising the discount rate, would not have as direct an effect on the interest rate that banks charge each other for loans. Option D, making an open market purchase, would increase the money supply and decrease interest rates, which is the opposite of what the Fed wants to achieve in this situation.

When Banks Hold a Large Amount of Excess Reserves, Which