Consider the following conversation between Kate, a teaching assistant, and Eileen and Hubert, students in her Economics class. KATE: Nowadays, the Federal Reserve can influence household spending, business investment, production, employment, and inflation in the United States. Could someone explain how the Fed manages the interest rate levels? EILEEN: The Fed does so by changing . HUBERT: In order to do this, the Fed changes and . KATE: Suppose the current federal funds rate is 2.00% and the Fed wants to raise it. What should the Fed do? EILEEN: The Fed needs to set the IOR rate the current federal funds rate, say, to . KATE: Please identify which of the following accurately explains the effect of this strategy by the Fed? Banks will borrow reserves in the federal funds market at 2.00% and place those reserves on deposit with the Fed to earn 3.00%. Banks will remove the reserves they hold with the Fed that earn 1.50% and lend out those reserves in the federal funds market to earn 2.00%. HUBERT: As a result, reserves in the federal funds market , pushing the federal funds rate. KATE: What does the Fed need the ON-RRP rate for? EILEEN: The Fed