When banks borrow and lend reserves in the federal funds market,
A) the total reserves of the banking system increase.
B) the total reserves of the banking system shrink.
C) the total reserves of the banking system stay the same.
D) the reserves of the banking system become part of M1.

Question

Quizplus · Accepted Answer

When banks borrow and lend reserves in the federal funds market, it does not affect the total reserves of the banking system because the same reserves are just being transferred between banks. Therefore, the total reserves of the banking system stay the same.

When Banks Borrow and Lend Reserves in the Federal Funds