Asked by Asive Sibeko on Jul 15, 2024
Verified
When the Federal Reserve began paying interest on excess reserves,the effect on monetary policy was
A) making open market operations less effective.
B) adding a new tool to monetary policy.
C) reducing the effect of a change in reserve requirements.
D) eliminated the need for the Federal Funds Market.
Monetary Policy
Monetary policy involves the actions of a central bank or other regulatory authorities that determine the size and rate of growth of the money supply, which in turn affects interest rates.
Excess Reserves
The amount of reserves that a bank holds beyond what is required by regulations or reserve requirements.
Federal Reserve
The central banking system of the United States, responsible for monetary policy, including regulating banks, managing the country's money supply, and stabilizing the financial system.
- Acknowledge the assortment of monetary policy mechanisms utilized by the Federal Reserve.
Verified Answer
GS
Gurnoor SinghJul 19, 2024
Final Answer :
B
Explanation :
By beginning to pay interest on excess reserves, the Federal Reserve added a new tool to monetary policy. This allowed them to potentially influence the banking sector's behavior by adjusting the interest rate on excess reserves. However, this move may have also made open market operations less effective as a tool for controlling the money supply. It did not eliminate the need for the Federal Funds Market, and it may have had some impact on the relationship between reserve requirements and monetary policy, but this effect would likely be secondary to the introduction of a new policy tool.
Learning Objectives
- Acknowledge the assortment of monetary policy mechanisms utilized by the Federal Reserve.