Question

g If the Fed reduces the interest paid on banks' reserves, it is trying to make banks hold Multiple Choice less excess reserves. more required reserves. less required reserves. more excess reserves.

Answer 1

If the Federal Reserve decreases the interest paid on banks' reserves, then, it means it is trying to make banks hold less required reserves.

A decrease in interest paid on banks' reserves relates with charging a lower interest rate that ensure that bank keeps borrowing.

• So if Fed wants to give banks more reserves, it will reduce the interest rate it charges, thus, inducing the banks to borrow more.

In conclusion, the Option C is correct because If the Federal Reserve decreases the interest paid on banks' reserves, then, it means it is trying to make banks hold less required reserves.

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