If individuals suddenly increase their withdrawals from the banking system, the federal funds rate should:
A)increase as bank reserves decline.
B)decrease as bank reserves decline.
C)increase as bank reserves increase.
D)decrease as bank reserves increase.

Question

Quizplus · Accepted Answer

When individuals withdraw money from banks, the banks' reserves decrease. This reduction in reserves means banks have less money available to lend to each other overnight. As a result, the demand for federal funds increases while the supply decreases, leading to a higher federal funds rate.

If Individuals Suddenly Increase Their Withdrawals from the Banking System