Everything else held constant,in the market for reserves,when the federal funds rate is 1%,increasing the interest rate paid on excess reserves from 1% to 2%
A)lowers the federal funds rate.
B)raises the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect on the federal funds rate.

Question

Quizplus · Accepted Answer

When the interest rate paid on excess reserves increases, banks have less incentive to lend out their excess reserves in the federal funds market because they can earn more by holding onto them. This reduces the supply of funds available for lending, which, according to the law of supply and demand, increases the federal funds rate.

Everything Else Held Constant,in the Market for Reserves,when the Federal