When the Fed decreases the interest rate paid on reserves, it:
A) increases the reserve-deposit ratio (rr).
B) decreases the reserve-deposit ratio (rr).
C) increases the monetary base (B).
D) decreases the monetary base (B).

Question

Quizplus · Accepted Answer

When the Fed decreases the interest rate paid on reserves, banks are less incentivized to hold excess reserves and instead lend them out, decreasing the reserve-deposit ratio. This in turn increases the money supply and decreases the interest rate in the market.

When the Fed Decreases the Interest Rate Paid on Reserves