Which of the following is true of the quantity of reserves demanded?
A) The quantity of reserves demanded is constant over time for almost every bank.
B) The quantity of reserves demanded increases as the federal funds rate falls.
C) The quantity of reserves demanded increases as the inflation rate increases.
D) The quantity of reserves demanded increases at a constant rate over time.

Question

Quizplus · Accepted Answer

The quantity of reserves demanded by banks depends on the federal funds rate. When the federal funds rate falls, banks demand more reserves to meet their reserve requirements and other operational needs. Therefore, as the federal funds rate falls, the quantity of reserves demanded increases. The other options are not true. The quantity of reserves demanded is not constant over time, it varies with changes in the interest rate and other economic factors. The quantity of reserves demanded does not depend on the inflation rate. Also, it does not increase at a constant rate over time.

Which of the Following Is True of the Quantity of Reserves