An increase in the overnight interest rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate.

Question

Quizplus · Accepted Answer

An increase in the overnight interest rate typically decreases bank reserves because it becomes more expensive for banks to borrow money overnight. This, in turn, decreases the money supply if banks lend less as a result of having fewer reserves.

An Increase in the Overnight Interest Rate ________ Bank Reserves