Everything else constant, in the reserves market, if the demand for federal funds intersects the supply curve of reserves on the flat section, increasing the required reserve ratio

Question

BlackTom AI · Accepted Answer

On the flat portion of the reserves supply curve, the federal funds rate is fixed by the monetary authority, so changes in demand for reserves do not change that rate.

1) Relevant concepts:
- The reserves market equilibrium is where demand for reserves (banks’ desired holdings given reserve requirements and payment needs) intersects the supply of reserves (provided by the central bank).
- The supply curve can have a flat (perfectly elastic) segment at the central bank’s administered rate (or interest on reserves), meaning the Fed will supply whatever quantity is needed at that rate.
- Raising the required reserve ratio increases banks’ required holdings and therefore shifts the reserves demand curve rightward.

2) Step-by-step reasoning:
- Start with initial demand D0 and supply S which is horizontal at r0 (the flat section). Equilibrium is at (Q0, r0).
- Increase the required reserve ratio → banks must hold more reserves → demand shifts right to D1.
- With S horizontal, any rightward shift in demand will be met by an increase in supplied reserves (the central bank supplies additional reserves at r0) so the intersection remains at r0.

3) Intermediate “calculation”/logic steps:
- Equilibrium condition: r* satisfies D(r*) = S(r*). On the flat part, S(r) = any Q for r = r0 and S(r) = 0 for r ≠ r0. After demand shifts, D1(r0) = larger Q, but S still accommodates that Q at r0. So r* remains r0.

4) Why the correct answer is correct:
- Because supply is perfectly elastic at the flat segment, the federal funds rate is pinned at the flat-segment rate regardless of shifts in demand, as long as the new equilibrium remains on that segment.

5) Why other options are incorrect:
- “Lowers the federal funds rate”: Incorrect because a rightward demand shift would not reduce the rate when supply is flat.
- “Increases the federal funds rate”: Incorrect because the Fed supplies extra reserves at the same rate on the flat segment.
- “Has an indeterminate effect”: Incorrect here because the effect is determinate (no change) so long as the new intersection stays on the flat portion.

6) Conclusion:
The federal funds rate does not change; this matches the provided answer: “does not affect the federal funds rate.”

Everything else constant, in the reserves market, if the demand for federal funds intersects the supply curve of reserves on the flat section, increasing the required reserve ratio单项选择题

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