In the market for reserves,a lower interest rate paid on excess reserves
A)decreases the supply of reserves.
B)increases the supply of reserves.
C)decreases the effective floor for the federal funds rate.
D)increases the effective floor for the federal funds rate.

Question

Quizplus · Accepted Answer

A lower interest rate paid on excess reserves decreases the incentive for banks to hold onto these reserves, thus lowering the effective floor for the federal funds rate as banks are more likely to lend out excess reserves at lower rates.

In the Market for Reserves,a Lower Interest Rate Paid on Excess