The opportunity cost of holding excess reserves will be lower at an 8 percent federal funds rate in comparison to a 10 percent federal funds rate.

Question

Quizplus · Accepted Answer

The opportunity cost of holding excess reserves is the difference between the interest rate earned on reserves and the federal funds rate. Therefore, if the federal funds rate decreases from 10 percent to 8 percent, the opportunity cost of holding excess reserves will be lower, making it less costly for banks to hold excess reserves.

The Opportunity Cost of Holding Excess Reserves Will Be Lower