Title: QUIZ: Monetary Policy (3/4): Reservation Rate and Arbitrage -- Economic Lowdown Video Series
Course: Andria Testing FRE2 > Section: Monetary Policy (3/4): Reservation Rate and Arbitrage -- Economic Lowdown Video Series

Q: How is the interest on reserve balances rate a reservation rate?
- Banks should not demand a higher rate for their funds. 
- Banks should not be willing to accept a lower rate for their funds.
A: Banks should not be willing to accept a lower rate for their funds.

Q: When the interest on reserve balances rate is higher than the federal funds rate, how will banks respond?
- Banks will withdraw from their account at their Federal Reserve Bank and lend the funds in the federal funds market. 
- Banks will borrow in the federal funds market and deposit funds at their Federal Reserve Bank.
A: Banks will borrow in the federal funds market and deposit funds at their Federal Reserve Bank.

Q: When the interest on reserve balances rate is higher than the federal funds rate, how will arbitrage pull the two rates together?
- The increase in competition for funds in the federal funds market will pull the federal funds rate higher.
- The increase in competition for funds in the federal funds market will push the federal funds rate lower.
- When banks deposit the funds in their reserve accounts at the Fed, it will pull the interest on reserve balances rate higher.
- When banks deposit funds in their reserve accounts at the Fed, it will push the interest on reserve balances rate lower.
A: The increase in competition for funds in the federal funds market will pull the federal funds rate higher.

Q: If the FOMC raises the target range, how does arbitrage ensure the policy change is implemented?
- The Fed raises the federal funds rate, and arbitrage ensures the interest on reserves balances rate moves up.
- The Fed lowers the federal funds rate, and arbitrage ensures the interest on reserves balances rate moves up.
- The Fed raises the interest on reserves balances rate, and arbitrage ensures the federal funds rate moves up.
- The Fed lowers the interest on reserves balances rate, and arbitrage ensures the federal funds rate moves up.
A: The Fed raises the interest on reserves balances rate, and arbitrage ensures the federal funds rate moves up.