Which condition correlates with an increased demand for reserves affecting the federal funds market?

An increase in demand for reserves in the federal funds market typically indicates that banks require more reserves than are available in the system. This heightened demand leads to a tightening of the reserve supply, putting upward pressure on the market funds rate, which is the interest rate at which banks lend reserves to each other overnight.

When banks face higher demand for reserves, they are willing to pay more to obtain those reserves. As a result, the market funds rate will increase to reflect this higher demand. The increased rate serves to allocate the limited reserves effectively among banks in need, ensuring that those institutions that require reserves for meeting their obligations can obtain them, but at a higher cost due to increased demand.

In contrast, if the market funds rate were to decrease or remain unchanged, it would not reflect an increased demand for reserves, and if the rate were to equal the target rate without any pressures, that would imply a balance rather than a heightened demand scenario. Therefore, an increase in the market funds rate aligns with the condition of increased demand for reserves.