QuestionAugust 5, 2025

Benjamin,an economist at a regional bank, notices that the Fed has raised the IORB rate from 2% to 3% He consequently expects changes in how banks behave in the overnight lending market. What outcome should Benjamin expect? That banks will increase their lending in the federal funds market at rates below 3% That the federal funds rate will fall below 2% That the federal funds rate will rise toward 3% That fewer banks will use the Fed to hold reserves.

Benjamin,an economist at a regional bank, notices that the Fed has raised the IORB rate from 2% to 3% He consequently expects changes in how banks behave in the overnight lending market. What outcome should Benjamin expect? That banks will increase their lending in the federal funds market at rates below 3% That the federal funds rate will fall below 2% That the federal funds rate will rise toward 3% That fewer banks will use the Fed to hold reserves.
Benjamin,an economist at a regional bank, notices that the Fed has raised the IORB rate from 2%  to 3%  He
consequently expects changes in how banks behave in the overnight lending market. What outcome should
Benjamin expect?
That banks will increase their lending in the federal funds market at rates below 3% 
That the federal funds rate will fall below 2% 
That the federal funds rate will rise toward 3% 
That fewer banks will use the Fed to hold reserves.

Solution
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Answer

That the federal funds rate will rise toward 3\% Explanation 1. Understand the Impact of IORB Rate Increase The Interest on Reserve Balances (IORB) rate increase from 2% to 3% makes holding reserves more attractive for banks. 2. Predict Federal Funds Rate Movement Banks will demand higher rates in the federal funds market, pushing the federal funds rate toward the new IORB rate of 3%.

Explanation

1. Understand the Impact of IORB Rate Increase<br /> The Interest on Reserve Balances (IORB) rate increase from 2% to 3% makes holding reserves more attractive for banks.<br /><br />2. Predict Federal Funds Rate Movement<br /> Banks will demand higher rates in the federal funds market, pushing the federal funds rate toward the new IORB rate of 3%.
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