If the Fed raises the interest rate paid on excess reserves while holding the federal funds rate unchanged, then banks will

Question

Quizplus · Accepted Answer

If the interest rate paid on excess reserves is raised, banks will be incentivized to keep more excess reserves as they can earn a higher return without taking any risk. This would result in fewer reserves being lent out in the federal funds market, which would increase the federal funds rate. Since the federal funds rate is held unchanged, banks will have less of an incentive to lend out their excess reserves, leading to an increase in the amount of excess reserves held. Therefore, choice B is the best answer.

If the Fed Raises the Interest Rate Paid on Excess