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: -The Fed can influence the money supply by modifying reserve requirements, which generally refers to the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy.

Detailed explanation-3: -Raising the rate makes it more expensive to borrow from the Fed. That lowers the supply of available money, which increases the short-term interest rates. Lowering the rate has the opposite effect, bringing short-term interest rates down.

Detailed explanation-4: -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.