If a switch occurs from deposits into currency, what happens to the federal funds rate? use the supply and demand curve of the market for reserves to explain your answer.

The conversion of deposits into currency reduces the number of reserves, which reduces the supply of reserves at any given interest rate, shifting the supply curve to the left.
As deposits fall, required reserves fall, causing the demand curve to shift to the left.
However, because the decrease in required reserves is only a fraction of the decrease in the supply of reserves (due to the required reserve ratio being much less than one), the supply curve shifts left more than the demand curve.
Thus, if the discount rate is initially higher than the fed funds target, the fed funds rate will rise.
If, on the other hand, the fed funds rate is at the discount rate, it will remain at the discount rate.

Therefore, the answer to the above-given question is shown.

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