If the Fed carries out an open market operation to buy U.S. government securities, the federal funds rate ___________and the quantity of reserves___________ .
A) rises; increases
B) falls; increases
C) falls; decreases
D) rises; decreases

Question

Quizplus · Accepted Answer

When the Fed buys U.S. government securities through open market operations, it injects money into the banking system. This increases the amount of reserves banks have available to lend out, which pushes down the federal funds rate (the rate at which banks lend to each other overnight). Therefore, the federal funds rate falls and the quantity of reserves increases.

If the Fed Carries Out an Open Market Operation to Buy