The interest rate in the federal funds market:
A) is determined by the imposition of price controls imposed by the Fed.
B) rises when the quantity of funds demanded by banks seeking additional reserves exceeds the quantity supplied by banks with excess reserves.
C) will fall if the Fed sells bonds and, thereby, reduces the reserves available to banks.
D) is an interest rate that is largely unaffected by the policies of the Fed.

Question

Quizplus · Accepted Answer

The interest rate in the federal funds market is determined by the demand and supply of funds among banks. When the quantity of funds demanded by banks seeking additional reserves exceeds the quantity supplied by banks with excess reserves, the interest rate rises. Therefore, choice B is correct. Choice A is incorrect as the Fed does not impose price controls in the federal funds market. Choice C is incorrect as selling bonds reduces reserves and, in turn, increases the interest rate. Choice D is incorrect as the Fed's policies do affect the federal funds rate.

The Interest Rate in the Federal Funds Market