Answer to Question #60007 in Macroeconomics for Ryan

Question

For given increase in the supply of reserves to banks by the Fed, the drop in the federal funds rate
(FFR)
(a) is larger the more sensitive to the FFR the demand for reserves (by banks) is
(b) is larger the less sensitive to the FFR the demand for reserves (by banks) is
(c) does not depend on how sensitive to the FFR the demand for reserves (by banks) is
(d) is equal to the total change in the supply of reserves

Answer 1

For given increase in the supply of reserves to banks by the Fed, the drop in the federal funds rate (FFR) is larger the less sensitive to the FFR the demand for reserves (by banks) is. So, the right answer is (b) "is larger the less sensitive to the FFR the demand for reserves (by banks) is".