Question

Why is raising the interest rate on reserves considered a contractionary
monetary policy?
A. It causes banks to lower their prime interest rate in response.
B. It makes it more expensive for businesses to hire new employees.
C. It prevents investors from withdrawing their money from banks.
D. It encourages banks to keep money in reserve instead of lending
it.

Answer 1

Answer:

D. It encourages banks to keep money in reserve instead of lending

Explanation:

If the central bank raises interest rates on reserves, it means that commercial banks will have more incentive to hold more money in reserves, which also means that they will have less funds to loan out. If commercial banks make less loans, they create less money, leading to a reduction of the money supply, and this is why this policy is considered to be contractionary.

Answer 2

Answer:

D.

It encourages banks to keep money in reserve instead of lending

It makes it more

Explanation: