ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -In the market for reserves, when the federal funds rate is above the interest rate paid on excess reserves, then the demand curve for reserves is the latter or a downward sloping curve having a negative slope.

Detailed explanation-2: -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-3: -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-4: -If rates rise, it becomes more costly to borrow money. When the Fed boosts its lending rate, consumers and businesses can see increased costs for borrowing, which can discourage spending. Higher costs for credit mean you’ll pay more for goods over time and can even discourage you from making certain purchases.

Detailed explanation-5: -The demand curve slopes down to capture the idea that as the cost of borrowing decreases, banks are willing to borrow more funds to increase their holdings of reserves. The supply curve is vertical because only the Fed can supply reserves. The intersection of the two lines determines the FFR.