Holding everything else constant,if the federal funds rate rises,then the demand for
A) excess reserves rises because they have a higher return.
B) excess reserves falls because they have a higher cost.
C) required reserves falls because the cost of borrowing from the Fed is relatively higher.
D) required reserves rises because the cost of borrowing from the Fed is relatively lower.
E) reserves will not change because the Fed sets the level of required reserves.

Question

Quizplus · Accepted Answer

When the federal funds rate rises, banks will borrow less from each other and choose to hold more of their reserves at the Fed, leading to a decrease in excess reserves. This is because the opportunity cost of holding excess reserves increases as the federal funds rate rises.

Holding Everything Else Constant,if the Federal Funds Rate Rises,then the Demand