If the current market federal funds rate equals the target rate and the demand for reserves increases, the likely response in the federal funds market will be:

Question

Quizplus · Accepted Answer

When the demand for reserves increases, it means that banks need more funds to meet their reserve requirements. This puts upward pressure on the federal funds rate in the market, as banks are willing to pay more to obtain the necessary funds. If the market federal funds rate equals the target rate set by the Fed, an increase in demand for reserves would cause the market rate to rise above the target rate, causing the Fed to inject more funds to bring the rate back down. Therefore, the likely response in the federal funds market would be an increase in the market federal funds rate.

If the Current Market Federal Funds Rate Equals the Target