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Macroeconomics

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Interest on Reserves During Recession

MACRO-A1KYKE

During the 2008 recession, the Federal Reserve started paying interest on the reserves held by banks at the Federal Reserve.

What roles does paying interest on reserves play in the context of the crisis?

Select ALL that may apply.

A

It encourages banks to lend their money.

B

It provides a floor to the federal funds rate when the Federal Reserve is supporting banks as a lender of last resort.

C

The interest paid capitalizes banks giving them the funds they need in a crisis.

D

It provides a tool to control inflation when inflationary pressures return.

E

It increases deposit rates in order to help savers without raising the overall interest rate.