If the demand for reserves is unchanged, an increase in the quantity of reserves will
A) lower the federal funds rate.
B) increase the federal funds rate.
C) not affect the federal funds rate.
D) None of the above answers is correct.

Question

Quizplus · Accepted Answer

An increase in the quantity of reserves would lead to excess reserves in the banking system, which in turn would lower the federal funds rate. When banks have excess reserves, they are more willing to lend to other banks at a lower interest rate, which in turn lowers the federal funds rate.

If the Demand for Reserves Is Unchanged, an Increase in the Quantity