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 __________.
A) rise; decrease
B) fall; decrease
C) fall; increase
D) rise; increase

Question

Quizplus · Accepted Answer

When the Federal Reserve decreases the quantity of reserves, the federal funds rate will rise because there are less reserves available for banks to lend to each other overnight. This will lead to a decrease in the supply of loanable funds because banks will have less excess reserves to lend out to customers.

Suppose That the Market for Reserves Is in Equilibrium and Then