The Federal Reserve has determined excess reserves will need to decrease by $750 billion in order to return the economy to full employment. To achieve this goal, the Federal Reserve shouldMultiple choice question.reduce the marginal propensity to consume.increase the interest rate paid on reserves.increase the marginal propensity to consume.reduce the interest rate paid on reserves.
Question
The Federal Reserve has determined excess reserves will need to decrease by $750 billion in order to return the economy to full employment. To achieve this goal, the Federal Reserve shouldMultiple choice question.reduce the marginal propensity to consume.increase the interest rate paid on reserves.increase the marginal propensity to consume.reduce the interest rate paid on reserves.
Solution
The Federal Reserve can decrease excess reserves by manipulating the interest rate paid on reserves. When the Federal Reserve decreases the interest rate paid on reserves, banks are less likely to hold onto reserves and more likely to lend out money to consumers and businesses. This increases the money supply in the economy, which can stimulate economic activity and reduce unemployment. Therefore, to decrease excess reserves by $750 billion and return the economy to full employment, the Federal Reserve should reduce the interest rate paid on reserves.
Similar Questions
According to the Federal Reserve, the money supply will need to decrease by $25 billion to return the economy to full employment. If the money multiplier is 10, what will be the required change in excess reserves?Multiple choice question.−$2.5 billion$250 billion$2.5 billion−$250 billion
The actual change in the money supply as a result of an increase in excess reserves will be less than the maximum change if banksGroup of answer choicesdo not lend out all of their excess reservesborrow from the Federal Reservesell some of their government securities to the Federal Reservelend only their excess reserves
What is one way the Federal Reserve can reduce the amount of money available in the economy?A.Buying treasury securitiesB.Lowering the interest on reservesC.Raising the discount rateD.Selling treasury securities
For decades, the reserve requirement has rarely been used as a tool of monetary policy because:Multiple choice question.it is difficult to determine the impact of such a change so other tools are used instead.most banks keep excess reserves anyway so such a change would not have much impact.this would require Congressional approval and that is too cumbersome for the Fed.frequently changing the reserve requirement would be very disruptive to the banking sector and credit markets.
The problem of banks choosing to hold excess reserves does not affect __________ .Select the correct answer below:contractionary monetary policyexpansionary fiscal policycontractionary fiscal policyexpansionary monetary policy
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