When the federal funds interest rate is 6 percent, the quantity of reserves demanded is $100 billion. If the quantity of reserves is actually $110 billion, then the

Question

Quizplus · Accepted Answer

The excess supply of reserves (110 billion - 100 billion = 10 billion) will put downward pressure on the federal funds rate. Banks will want to lend out their excess reserves and will lower the interest rate at which they are willing to do so in order to compete with each other. Therefore, the federal funds rate falls.

When the Federal Funds Interest Rate Is 6 Percent, the Quantity