When the federal funds interest rate is 6 percent, the quantity of reserves demanded is $100 billion. If the quantity of reserves is actually $110 billion, then the
A) demand for reserves increases and the demand for reserves curve shifts rightward.
B) demand for reserves decreases and the demand for reserves curve shifts leftward.
C) federal funds rate rises.
D) federal funds rate falls.

Question

Quizplus · Accepted Answer

When the quantity of reserves exceeds the quantity demanded (as in this case, where actual reserves are $110 billion compared to a demand of $100 billion at a 6 percent interest rate), the federal funds rate tends to fall. This is because banks have more reserves than they need, so they are more willing to lend out these excess reserves at a lower rate.

When the Federal Funds Interest Rate Is 6 Percent, the Quantity