State whether the following statement is true or false AND explain why: "An increase in the interest rate paid on excess reserves will always cause an increase in the federal reserve funds rate."

Indicate whether the statement is true or false

False. If the interest rate paid on excess reserves is set below the federal funds rate, an increase in the interest rate paid on excess reserves will only cause an increase in the federal funds rate if the interest rate paid on excess reserves is increased above the original federal funds rate level. If the increase in the interest rate paid on excess reserves is such that the new rate is still below the federal funds rate, then the federal funds rate does not change, everything else held constant.