An increase in the quantity of reserves leads to a
A) leftward shift in the demand curve for reserves.
B) decrease in the price level.
C) fall in the federal funds rate.
D) reduction in the velocity of circulation.

Question

Quizplus · Accepted Answer

When there is an increase in the quantity of reserves, banks have more reserves to lend out to other banks. This leads to a decrease in the federal funds rate, as banks have less demand for borrowing reserves from each other. This decrease in the federal funds rate leads to a decrease in interest rates throughout the economy, which can lead to increased borrowing, investment, and economic activity.

An Increase in the Quantity of Reserves Leads to a