When the Fed makes higher interest payments on bank reserves, banks will hold ________ reserves which will ________ the money supply.
A) more; increase
B) more; decrease
C) less; increase
D) less; decrease

Question

Quizplus · Accepted Answer

When the Fed increases the interest payments on bank reserves, banks are incentivized to hold more reserves instead of lending them out. This reduces the amount of money circulating in the economy, thereby decreasing the money supply.

When the Fed Makes Higher Interest Payments on Bank Reserves