ECONOMICS (CBSE/UGC NET)

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ECONOMICS

MONETARY POLICY

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
On October 1, 2008, Congress authorized the Federal Reserve to begin paying ____ on the required and excess reserves of financial institutions. Prior to this change, financial institutions gained no return on their required reserves, acting as an implicit tax.
A
Interest
B
Mr. Pips thinks the answer is “interest”
C
Either A or B
D
None of the above
Explanation: 

Detailed explanation-1: -Required Reserves Ended during the Financial Crisis. The Fed’s new authority gave policymakers another tool to use during the financial crisis. Paying interest on reserves allowed the Fed to increase the level of reserves and still maintain control of the federal funds rate.

Detailed explanation-2: -During the Great Recession, the federal reserve lowered the reserve requirement rate which led to lower interest rates, and that further led to higher spending throughout the economy.

Detailed explanation-3: -The most significant was interest on reserve balances (IORB). Congress had given the Fed authority to pay IORB in 2006, with a start date of 2011. The start date was pushed up to October 2008 so the Fed could use the tool during the Financial Crisis.

Detailed explanation-4: -Banks shall maintain minimum required reserves to the amount of 10% of the deposit base (effective from 1 December 2008) with two exceptions (effective from 1 January 2009): 1. on funds attracted by banks from abroad: 5%; 2.

There is 1 question to complete.
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