Question

In the market for reserves, when the federal funds rate is above the interest rate paid on excess reserves, the demand curve for reserves is

A) vertical.
B) horizontal.
C) positively sloped.
D) negatively sloped.

Answer 1

A) negatively sloped.

Step-by-step explanation:

Usually the demand for reserves is negatively sloped, like any normal demand curve, due to the inverse relationship between quantity demanded and price (interest rate is the price of money).

The demand curve for federal funds will have a negative slope until the interest rate paid on excess reserves equals the federal funds rate. At this point, the demand curve will become infinitely elastic, and therefore horizontal.