Question

Which economic tool would most likely be used as part of a contractionary

Answer 1

Answer:

O B. Raising interest on reserves

Explanation:

The Federal Reserve expects banks to keep a percentage of customer deposits as reserves. The reserves cater to both the normal and unexpected withdrawals. The Federal Reserve (Fed) also uses reserve requirements as a monetary policy tool.

Interest on reserves is one of the monetary policy tools that the Fed uses regularly. The Fed pays interest on any excess reserves held by the banks. Increasing the interest paid on reserves encourages banks to hold more money.  Decreases the interest prompts the banks to lend out more. Contractionary monetary policies are measures aimed at decreasing the money supply in the economy. Increasing interest on reserves increases money held in the banking sectors, thereby slowing down money circulation.