Fed Policy Instruments

This question tests general market knowledge of how central banks transmit monetary policy through the banking system. Candidates need to understand that the Fed can influence short term rates by adjusting the rate it pays banks on reserves, which changes the incentive for banks to hold cash versus lend it out. Interviewers ask this because it checks whether you understand the tools of monetary policy, the role of bank reserves, and how policy settings affect broader credit conditions and market rates.