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

Question

Quizplus · Accepted Answer

The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight. A higher federal funds rate increases the opportunity cost of holding reserves because banks could be earning more by lending out those reserves. Consequently, this increases the incentive for banks to economize on reserves, lending out more to earn higher interest.

The Higher the Federal Funds Rate, the ________ the Opportunity