The higher the federal funds rate, the ________ the opportunity cost of holding reserves, which ________ the incentive to economize on reserves.

Question

Quizplus · Accepted Answer

When the federal funds rate is higher, the opportunity cost of holding reserves increases. This means that banks have a greater incentive to economize on reserves, as holding excess reserves will now result in a higher cost. Therefore, as the federal funds rate increases, banks are more likely to lend out excess reserves, reducing the amount of reserves held in the banking system.

The Higher the Federal Funds Rate, the ________ the Opportunity