If the demand for reserves is fixed, the larger the supply of reserves provided through open market operation, the
A)higher the fed funds rate.
B)greater the rediscount rate.
C)higher the interest rate.
D)lower the fed funds rate.

Question

Quizplus · Accepted Answer

The larger supply of reserves through open market operations will increase the amount of reserves available in the banking system, leading to a decrease in the demand for reserves. This will cause the fed funds rate, which is the rate at which banks lend reserves to each other overnight, to decrease, as banks will have extra reserves to lend out. Therefore, D is the correct answer.

If the Demand for Reserves Is Fixed, the Larger the Supply