A rise in the overnight rate ________.
A) decreases the opportunity cost of holding desired reserves
B) lowers the opportunity cost of holding desired reserves
C) increases the opportunity cost of holding excess reserves
D) lowers the opportunity cost of holding excess reserves

Question

Quizplus · Accepted Answer

An increase in the overnight rate means that the cost of borrowing reserves overnight increases. This makes it more expensive for banks to hold excess reserves and they may choose to lend out these reserves instead. Therefore, the opportunity cost of holding excess reserves increases.

A Rise in the Overnight Rate ________