Paying a higher interest rate on reserves held at the Fed will tend to:
A) increase the money supply.
B) decrease the money supply.
C) not change the money supply.
D) have an ambiguous effect on the money supply.

Question

Quizplus · Accepted Answer

Paying a higher interest rate on reserves held at the Fed will increase the incentive for banks to hold reserves rather than lend them out, which decreases the amount of lending and money creation in the economy, leading to a decrease in the money supply.

Paying a Higher Interest Rate on Reserves Held at the Fed