To prevent banks from using excess reserves to make loans that would increase the money supply, the Federal Reserve could conduct open-market ______ and _____ the interest rate paid on bank reserves.
A) purchases; raise
B) purchases; lower
C) sales; raise
D) sales; lower

Question

Quizplus · Accepted Answer

The Federal Reserve could conduct open-market sales and raise the interest rate paid on bank reserves to prevent banks from using excess reserves to make loans, thereby increasing the money supply. Open-market sales remove liquidity from the banking system, making it more expensive for banks to obtain funds, while raising the interest rate on reserves encourages banks to hold onto their reserves instead of lending them out.

To Prevent Banks from Using Excess Reserves to Make Loans