Suppose that the market for reserves is in equilibrium and then the Federal Reserve decreases the quantity of reserves by $2 billion. The federal funds rate will _ and the supply of loanable funds will _.

Question

Quizplus · Accepted Answer

When the Federal Reserve decreases the quantity of reserves by $2 billion, this causes the federal funds rate to rise as the demand for reserves increases relative to the reduced supply. In turn, the supply of loanable funds will decrease as banks have less reserves to lend out. This leads to a higher cost of borrowing and a reduction in the quantity of loanable funds supplied. Therefore, the correct answer is D: rise; decrease.

Suppose That the Market for Reserves Is in Equilibrium and Then