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 ________.

Question

Quizplus · Accepted Answer

When the Federal Reserve decreases the quantity of reserves, the federal funds rate will rise due to the decreased supply of reserves. This action makes it more expensive for banks to borrow reserves, leading to a decrease in the supply of loanable funds as banks will have less money to lend out.

Suppose That the Market for Reserves Is in Equilibrium and Then