If the Fed wanted to expand the money supply as part of an antirecession strategy, it could
A) increase the interest rate paid on excess reserves encouraging banks to extend more loans.
B) decrease the interest rate paid on excess reserves encouraging banks to extend more loans.
C) decrease the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.
D) increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

Question

Quizplus · Accepted Answer

To expand the money supply, the Fed would want to encourage banks to extend more loans. Decreasing the interest rate paid on excess reserves would incentivize banks to lend out more money, increasing the money supply. Increasing the interest rate on excess reserves would have the opposite effect, discouraging banks from lending and decreasing the money supply. Choice A is incorrect because increasing the interest rate paid on excess reserves would not encourage banks to extend more loans. Choice C is also incorrect because decreasing the interest rate paid on excess reserves would actually encourage banks to lend out more money, not hold excess reserves.

If the Fed Wanted to Expand the Money Supply as Part