QuestionJuly 19, 2025

If the Fed wants banks to make more loans, it will: A. conduct open market sales. B. raise the discount rate. C. raise the Federal Funds rate. D. lower the interest rate it pays on reserves.

If the Fed wants banks to make more loans, it will: A. conduct open market sales. B. raise the discount rate. C. raise the Federal Funds rate. D. lower the interest rate it pays on reserves.
If the Fed wants banks to make more loans, it will:
A. conduct open market sales.
B. raise the discount rate.
C. raise the Federal Funds rate.
D. lower the interest rate it pays on reserves.

Solution
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Answer

D. lower the interest rate it pays on reserves. Explanation 1. Identify the effect of each option A. Open market sales decrease money supply, reducing loans. B. Raising the discount rate makes borrowing from the Fed more expensive, reducing loans. C. Raising the Federal Funds rate increases the cost of interbank loans, reducing loans. D. Lowering the interest rate on reserves encourages banks to lend more instead of holding reserves.

Explanation

1. Identify the effect of each option<br /> A. Open market sales decrease money supply, reducing loans.<br /> B. Raising the discount rate makes borrowing from the Fed more expensive, reducing loans.<br /> C. Raising the Federal Funds rate increases the cost of interbank loans, reducing loans.<br /> D. Lowering the interest rate on reserves encourages banks to lend more instead of holding reserves.
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