If the demand for reserves is fixed, the smaller the supply of reserves provided through open market operation, the
A)higher the fed funds rate.
B)greater the rediscount rate.
C)higher the government deficit.
D)lower the fed funds rate.

Question

Quizplus · Accepted Answer

When the supply of reserves is smaller, it becomes more difficult for banks to obtain the reserves they need to meet their reserve requirements. This increased competition for reserves drives up the fed funds rate, which is the interest rate that banks charge each other for overnight loans of reserves. Therefore, the correct answer is A) higher the fed funds rate.

If the Demand for Reserves Is Fixed, the Smaller the Supply