Question

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand of reserves and causes the federal funds interest rate to ________, everything else held constant.

Answer 1

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement increases the demand of reserves and causes the federal funds interest rate to increase, everything else held constant.

The discount rate is the rate which is charged by federal reserve bank to commercial bank for short-term loans. Lowering discount rate increases lending and spending by consumers and business and raising dicount rate discourage lending and spending by consumers and business.

And Interest on reserves is paid on excess reserves held at federal reserve.