An increase in reserves held by the Fed ________.
A) reduces the federal funds interest rate
B) reduces the price level
C) increases the tax rates
D) increases unemployment

Question

Quizplus · Accepted Answer

An increase in reserves held by the Fed leads to an increase in the supply of funds available for lending in the banking system, reducing the federal funds interest rate. This is because an increase in reserves means that banks have more money to lend to one another. As a result, they compete to lend out their reserves, leading to a decrease in the interest rate they charge each other for short-term loans.

An Increase in Reserves Held by the Fed ________