Question

suppose the interest on reserves (ior) rate is 2.5 percent and the federal funds rate is 2 percent. this will encourage banks to hold ______ reserves with the fed and lend _______ reserves in the federal funds market.

Answer 1

A higher interest on reserves (IOR) rate compared to the federal funds rate encourages banks to hold more reserves with the Fed and lend fewer reserves in the federal funds market.

Step-by-step explanation:

The interest on reserves (IOR) rate encourages banks to hold more reserves with the Fed and lend less reserves in the federal funds market.

When the IOR rate is higher than the federal funds rate, banks earn a higher interest rate by keeping their reserves with the Fed. This incentivizes them to hold more reserves. On the other hand, if banks lend their reserves in the federal funds market, they would only earn the lower federal funds rate. Therefore, the difference in interest rates encourages banks to hold more reserves and lend fewer reserves in the federal funds market.