If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold _____ excess reserves, which will _____ the money multiplier.
A) more; increase
B) more; decrease
C) fewer; increase
D) fewer; decrease

Question

Quizplus · Accepted Answer

If the Federal Reserve increases the interest rate paid on reserves, banks will be incentivized to hold onto more excess reserves because they can earn more interest on them. This will decrease the money multiplier because banks will have less incentive to lend out excess reserves and create new money.

If the Federal Reserve Increases the Interest Rate Paid on Reserves