To lower the short-term interest rate, the Federal Reserve can:
A) buy Treasury bills.
B) sell Treasury bills.
C) tell the banks to make more loans.
D) tell the banks to make fewer loans.

Question

Quizplus · Accepted Answer

Buying Treasury bills increases the money supply and allows banks to have more funds to lend out, which leads to a decrease in short-term interest rates. Selling Treasury bills would have the opposite effect and increase short-term interest rates. Telling banks to make more or fewer loans can influence the money supply indirectly, but buying Treasury bills is a more direct and effective tool for the Federal Reserve to lower short-term interest rates.

To Lower the Short-Term Interest Rate, the Federal Reserve Can