The quantity of reserves demanded decreases as the federal funds rate rises because
A)people want more liquid assets as the federal funds rate rises.
B)the price of bonds rise as the federal funds rate rises.
C)the opportunity cost of holding excess reserves increases as the federal funds rate rises.
D)people want more money to invest as the federal funds rate rises.

Question

Quizplus · Accepted Answer

As the federal funds rate rises, the opportunity cost of holding excess reserves increases. This is because banks can earn a higher return by lending out their excess reserves or purchasing other interest-bearing assets. As a result, banks become less willing to hold excess reserves and will demand fewer reserves at higher federal funds rates.

The Quantity of Reserves Demanded Decreases as the Federal Funds