If the Fed raised the reserve requirement, the demand for reserves would

Question

a. increase, so the federal funds rate would rise.
b. decrease, so the federal funds rate would fall.
c. increase, so the federal funds rate would fall.
d. decrease, so the federal funds rate would rise.

Answer 1

If the Federal Reserve raised the reserve requirement, banks would need to hold more reserves to meet the higher requirement. This would lead to an increase in the demand for reserves as banks adjust to the new requirement.

Given this scenario, the correct answer is:

a. increase, so the federal funds rate would rise.

When the demand for reserves increases and the supply of reserves remains constant, it puts upward pressure on the federal funds rate, as banks compete for the limited reserves available.