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Banks that borrow in the federal funds market do so because they are temporarily short of _____ reserves.

A. required
B. excess
C. federal

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Final answer:

Banks borrow in the federal funds market because they are temporarily short of required reserves. They can hold excess reserves above the legally mandated limit. This is particularly relevant during a recession when banks may be hesitant to lend.

Step-by-step explanation:

Banks that borrow in the federal funds market do so because they are temporarily short of required reserves. Banks are legally required to hold a minimum level of reserves, but no rule prohibits them from holding additional excess reserves above the legally mandated limit. For example, during a recession banks may be hesitant to lend, because they fear that when the economy is contracting, a high proportion of loan applicants become less likely to repay their loans.

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