How can the Fed use the interest rate paid on reserves as a policy tool? multiple choice If the Fed raises the interest rate paid on reserves, banks will hold more reserves leading to a decline in the money supply. If the Fed lowers the interest rate paid on reserves, banks will hold more reserves leading to a decrease in the money supply. If the Fed raises the interest rate paid on reserves, banks will hold fewer reserves leading to an increase in the money supply. If the Fed lowers the interest rate paid on reserves, banks will hold more reserves leading to an increase in the money supply