In the market for reserves,if the federal funds rate is above the interest rate paid on excess reserves,then an open market ________ the supply of reserves,raising the federal funds interest rate,everything else held constant.
A)sale decreases
B)sale increases
C)purchase increases
D)purchase decreases

Question

Quizplus · Accepted Answer

If the federal funds rate is above the interest rate paid on excess reserves, banks will prefer to lend their excess reserves in the Federal Funds market to earn a higher interest rate. This would increase the supply of reserves in the market and put downward pressure on the federal funds rate. In order to increase the federal funds rate, the Fed would have to decrease the supply of reserves by conducting open market sales. Therefore, a sale of reserves would decrease the supply of reserves and increase the federal funds interest rate.

In the Market for Reserves,if the Federal Funds Rate Is