What does an upward sloping supply curve imply in the context of federal funds market?

An upward sloping supply curve in the context of the federal funds market indicates that as the market federal funds rate increases, the quantity of reserves that banks are willing to lend also increases. This relationship is based on the principle that higher interest rates are generally more attractive to lenders, prompting them to supply more of the good—in this case, reserves—at the prevailing market rate.

In the federal funds market, banks lend reserves to each other, and the interest rate at which these transactions occur is known as the federal funds rate. When the federal funds rate rises, banks perceive an opportunity to earn more from lending their reserves. Therefore, they are incentivized to supply more reserves to the market. This demonstrates the direct relationship between the rate and the quantity supplied, characteristic of an upward sloping supply curve.

The other options do not accurately capture this relationship. A decrease in the supply of reserves would typically correlate with either a downward sloping curve or no change in demand. Similarly, equilibrium government bond rates and a vertical relationship with market risks are not directly linked to the supply curve dynamics in the federal funds market. The upward slope specifically highlights the responsiveness of the supply of bank reserves to changes in the interest rate, confirming the rationale behind why an increase in the