The higher the federal funds rate, the ___________the opportunity cost of holding reserves, which___________ the incentive to economize on reserves.

Question

Quizplus · Accepted Answer

When the federal funds rate is higher, the opportunity cost of holding reserves also increases. Banks are incentivized to economize on reserves to avoid the cost of foregone interest income. Therefore, the higher the federal funds rate, the higher the incentive to economize on reserves.

The Higher the Federal Funds Rate, the ___________The Opportunity Cost