Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It encourages banks to lend more by reducing the cost of reserves.
B
It discourages banks from lending as they can earn interest without taking risks.
C
It has no impact on the fiscal policy at all.
D
It increases the mandatory reserve ratio for banks.
Understanding the Answer
Let's break down why this is correct
Answer
Interest on reserves is the money that banks earn from the central bank for keeping their reserves, which are funds they must hold and not lend out. When the central bank raises the interest rate on reserves, banks are more likely to keep their money in reserves instead of lending it out. This can lead to less lending to businesses and consumers, which may slow down economic growth. For example, if a bank has a choice between lending money at a lower interest rate or earning a higher rate from the central bank, it might choose the safer option of holding reserves. Therefore, by changing the interest on reserves, the central bank can influence how much money banks are willing to lend, affecting overall economic activity and fiscal policy.
Detailed Explanation
When banks earn interest on their reserves, they might choose to keep their money safe instead of lending it. Other options are incorrect because Some might think that earning interest makes banks want to lend more; It's a common belief that interest on reserves doesn't affect fiscal policy.
Key Concepts
interest on reserves
fiscal policy
Topic
Bank Reserve Management
Difficulty
medium level question
Cognitive Level
understand
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