If the Fed wants to discourage bank lending, it will

Question

Multiple Choice
increase the interest paid on reserve balances held at the Fed.
decrease the interest paid on reserve balances held at the Fed.
buy government securities from banks.
lower the policy rate.

Answer 1

If the Fed wants to discourage bank lending, it will decrease the interest paid on reserve balances held at the Fed. By lowering the interest rate on reserves, banks have less incentive to hold onto their excess reserves and may choose to lend more instead; thus, increasing the interest on reserves makes it more attractive for banks to keep their funds at the Fed instead of lending them out.

So the correct answer is:

increase the interest paid on reserve balances held at the Fed.