Which of the following is likely to increase the federal funds rate?
A) An increase in the quantity of required reserves
B) A decrease in the supply of bank reserves
C) An increase in the interest paid on reserves deposited at the Fed
D) The purchase of long-term bonds in open market operations

Question

Quizplus · Accepted Answer

The federal funds rate is the interest rate at which banks lend and borrow reserves from each other in the overnight market. A decrease in the supply of bank reserves would increase the demand for reserves, leading to an increase in the federal funds rate.

Option A is incorrect because an increase in the quantity of required reserves would decrease the supply of reserves, leading to an increase in the federal funds rate, but this option does not clearly state the effect on the quantity of required reserves.

Option C is incorrect because increasing the interest paid on reserves deposited at the Fed would encourage banks to hold more reserves, reducing the supply of reserves and decreasing the federal funds rate.

Option D is incorrect because purchasing long-term bonds in open market operations would increase the supply of reserves, leading to a decrease in the federal funds rate.

Which of the Following Is Likely to Increase the Federal