Question

An increase in reserve requirements A. decreases nonborrowed reserves and decreases the federal funds rate. B. leaves nonborrowed reserves unchanged and increases the federal funds rate. C. leaves nonborrowed reserves unchanged and decreases the federal funds rate. D. increases nonborrowed reserves and increases the federal funds rate.

Answer 1

Answer:

B. leaves nonborrowed reserves unchanged and increases the federal funds rate.

Explanation:

Reserve requirement is the portion of the total funds that banks and other financial institutions are required by the Fed to keep and not lend out. If the Fed increases this reserve ratio, it means that that there will be less money to lend out; this reduces the supply of funds available and the federal funds rate will increase. Nonborrowed reserves however will remain unchanged.