Question

Question 10 Answer saved Points out of 4.00 P Flag question The Fed's policy to pay interest on required reserves is what? Select one: o a. Contractionary policy. . b. Expansionary policy. O c. An effort to stimulate banks' demand for money. O d. All of the above. o e. We cannot tell with certainty.

Answer 1

Answer: Expansionary policy

Federal bank pays interest on the required reserve as an opportunity cost to the depository institution. These reserves if invested in some other productive channels, it would fetch returns. But since it is deposited as required reserve, the returns are foregone. Hence, the interest paid for theses reserves is an alternative to the opportunity cost. By giving interest rate, more money is supplied into the economy and hence, it is an Expansionary policy.