ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the federal funds rate, or the rate at which banks are willing to lend reserves to each other, equals the rate paid on excess reserves by the Fed, the commercial banks will be indifferent between the two options.

Detailed explanation-2: -If the federal funds rate is above the interest on reserve balances rate, then banks will seek to increase the return on their money by withdrawing funds from their reserve balance accounts at the Fed and lending these funds out in the federal funds market.

Detailed explanation-3: -Holding everything else constant, if the federal funds rate rises, then the demand for excess reserves falls because they have a higher cost. Holding everything else constant, if the federal funds rate falls, then the demand for excess reserves rises because they have a lower cost.

Detailed explanation-4: -When the Federal Reserve increases the federal funds rate, it typically increases interest rates throughout the economy, which tends to make the dollar stronger. The higher yields attract investment capital from investors abroad seeking higher returns on bonds and interest-rate products.