Holding everything else constant,if the federal funds rate falls,then the demand for
A) excess reserves falls because they have a lower return.
B) excess reserves rises because they have a lower cost.
C) required reserves rises 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 falls, banks can borrow funds at a lower cost from other banks. As a result, the demand for excess reserves increases because banks may want to hold onto more reserves to meet their reserve requirements while taking advantage of the lower cost of borrowing.

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