Why does the fed pay interest to banks?

a. it is interest on money held in reserve.
b. it is interest on credit available to the fed.
c. it is interest on loans taken by the fed.
d. it is interest on government investments.

The Fed pay interest to banks because : A. it is interest on money held in reserve.
It's some sort of reward system which given for the banks that held their money in the Federal reserve

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Option (A). It is interest on money held in reserve.

Further Explanation-

Central Banks like the Federal Reserve are recommended to pay a certain rate of interest to depository institutions on which they have a certain amount of reserves that are required to be held against the deposit liabilities. The importance of this policy lies in the fact that the Federal Reserve holds around one trillion dollars in total reserves in these depository institutions. This was designed to broaden the scope of lending programs and address conditions in credit markets.  

The depository institutions are required to make certain statutory reserve requirements, which means a bank should hold reserves that equal to the amount it has in liabilities. The Fed expanded its balance sheet by buying Treasuries and mortgage-backed securities to ensure increased liquidity to the banking system. In the concept of banking, excess reserves are those reserves that are maintained in excess by banks against the total value of their liabilities. The Fed started paying interest on deposits only after the introduction of the Emergency Economic Stabilization Act of 2008. It is important to pay interest on reserves in order to avoid excessive money growth as a result of temporary injection of liquidity into the banking system. Depository institutions receive interest on reserves that they hold with the Fed.  

has introduced insurance programs.  

Learn more:

What was the charge of the 1807 indictment by the man who was chosen as vice president on February 17, 1801, by the house of representatives after thirty-six ballots? According to the supreme court, which of these most likely prompted the arrest of the protesters in Edwards v. south Carolina? After the civil war, the federal government began to extend civil rights to African Americans by?

Answer Details-

Grade- High School.

Chapter- The American Banking System.

Subject- Economics.

Additional Remarks- This chapter mentions in detail the banking policies, institutions, and tools in the United States.

Keywords-Liquidity, reserves, money flow, deposit liabilities, lending programs, credit markets, Emergency Economic Stabilization Act of 2008.

Because of prejudice

The correct answer is b