Question

Suppose that to finance its credit policy, the Fed pays an annual interest rate of 0.50 per cent on bank reserves. During the course of the current year, banks hold $1 trillion in reserves. What is the total amount of interest the Fed pays banks during the year?

Short answer

the total amount of interest the Fed pays banks during the year $\$5$billion.

Step-by-step solution

Introduction

Money velocity is the recurrence at which the typical same unit of cash is utilized to buy recently locally created labour and products in a given time span.

Explanation

Given,

Annual interest rate = $0.5\%$

Applying the formula,

MV = PY

$$\begin{gathered} \Rightarrow \frac{0.5}{100}\times 1 \\ =0.005 \end{gathered}$$

Or$\$5$billion