Question

To implement a credit policy intended to expand the liquidity of the banking system, the Fed desires to increase its assets by lending to a substantial number of banks. How might the Fed adjust the interest rate that it pays banks on reserves in order to induce them to hold the reserves required for funding this credit policy action? What will happen to the Fed's liabilities if it implements this policy action?

Short answer

A simultaneous impact of this will bring about an expansion in liabilities because of stores to be repaid to the organizations.

Step-by-step solution

introduction

Banks and other storehouse foundations keep up with accounts at the Federal Reserve to make instalments for themselves or for their clients. Assuming a storehouse establishment hopes to have an abundance end of day balance, then, at that point, it loans something similar to other safe organizations confronting a deficit.

explanation part (1)

The rate at which these assets are loaned for the time being premise is Fed financing cost. On the off chance that the Fed believes banks should hold their stores, the Fed ought to build the loan fee.

explanation part (2)

Paying higher loan costs on stores of storehouse foundations held by the Fed, builds the degree of stores and simultaneously likewise maintained control of the government support rate. This thus will assist Fed with giving liquidity important to help monetary security.

explanation part (3)

Henceforth, Fed should regard this save as its responsibility, as it should return the cash to banks and storehouse establishments for additional instalments to its genuine holders. Consequently, to execute a credit strategy to extend the liquidity of the financial framework, Fed will allow higher loan fees to storehouse establishments to hold savings.