An interesting development that happened in late 2008, relating to the Fed and bank reserves, was that the Fed
A) reduced the reserve ratio drastically.
B) required banks to hold more excess reserves.
C) started paying interest on the banks' reserves.
D) gave back all the reserves to the banks to hold as vault cash.

Question

Quizplus · Accepted Answer

In late 2008, the Fed started paying interest on the banks' reserves to encourage banks to hold on to their excess reserves rather than lending them out. This was done to help stabilize the financial system during the economic crisis. A reduction in the reserve ratio (choice A) or giving back all the reserves to the banks (choice D) would have had the opposite effect, as it would have encouraged banks to lend out more money. Requiring banks to hold more excess reserves (choice B) is a possible policy move, but it did not happen in late 2008.

An Interesting Development That Happened in Late 2008, Relating to the Fed