Question

In the market for reserves, a lower interest rate paid on excess reserves

A) decreases the supply of reserves.
B) increases the supply of reserves.
C) decreases the effective floor for the federal funds rate.

D) increases the effective floor for the federal funds rate.

Answer 1

Solution:-Option C is correct.

C.) decreases the effective floor for the federal funds rate.

Explaination:-In the market for reserves, a lower interest rate paid on excess reserves decreases the effective floor for the federal funds rate.In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale  decreases the supply of reserves, causing the federal funds rate to increase, everything else held constant.