If the current market federal funds rate equals the target rate and the demand for reserves decreases, the likely response in the federal funds market will be:

Question

Quizplus · Accepted Answer

If the demand for reserves decreases while the market federal funds rate equals the target rate, it means that there is excess supply of reserves in the market. This excess supply will put downward pressure on the market federal funds rate, causing it to decrease. This is because banks will have extra reserves that they can lend to other banks at a lower rate to earn some interest, causing the market federal funds rate to decline.

If the Current Market Federal Funds Rate Equals the Target