Question

After several major bank failures, a large number of people decide to withdraw their cash from commercial banks and keep it in their cookie jars at home. Suppose the goal of the Fed is to maintain a stable interest rate. In the aftermath of such cash withdrawal by people, the Fed should do what?

a) Lower interest rates
b) Raise interest rates
c) Implement strict regulations on cookie jars
d) Increase government spending

Answer 1

The Federal Reserve should lower interest rates to maintain a stable interest rate in response to cash withdrawal from banks.

Step-by-step explanation:

When a large number of people decide to withdraw their cash from commercial banks and keep it at home, it leads to a decrease in the amount of money available for lending, which can result in a decrease in the money supply. To counteract this decrease and maintain a stable interest rate, the Federal Reserve should lower interest rates.

By lowering interest rates, the Federal Reserve encourages borrowing and spending, which helps stimulate the economy and offset the decrease in the money supply caused by people withdrawing cash from banks and keeping it at home. Lower interest rates make loans more affordable, encouraging businesses and consumers to borrow and spend.

Raising interest rates, on the other hand, would reduce borrowing and spending and further decrease the money supply, exacerbating the effects of cash withdrawal from banks.