As the supply of funds in the banking system ____, the federal funds rate ____.
A) increases; declines
B) increases; increases
C) declines, declines
D) none of the above

Question

Quizplus · Accepted Answer

The federal funds rate represents the interest rate at which banks lend and borrow funds from each other overnight. When the supply of funds in the banking system increases, it means there is more money available to lend among banks, which puts downward pressure on the federal funds rate, causing it to decline. Conversely, when the supply of funds in the banking system declines, banks have less money available to lend, which puts upward pressure on the federal funds rate, causing it to increase.

As the Supply of Funds in the Banking System ____