Question

In: Economics

If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will...

If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold

Select one:

a. fewer reserves, so the reserve ratio will rise.

b. more reserves, so the reserve ratio will rise.

c. fewer reserves, so the reserve ratio will fall.

d. more reserves, so the reserve ratio will fall.

Solutions

Expert Solution

As we know that the Fed is the central bank of the US of America. The reserve ratio is the amount of reserves - or cash deposits - that a bank must hold on to and not lend out. The greater the reserve requirement, the less money that a bank can potentially lend - but this excess cash also staves off a banking failure and shores up its balance sheet. The Fed will hold more reserves, so the reserve ratio will rise.

The correct option is (b).

more reserves, so the reserve ratio will rise.

Rahul Sunny answered 2 years ago
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