While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent, " a more precise account of the Fed's action would be as follows:
A)"Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent."
B)"Today the Fed raised the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to rise by the same amount."
C)"Today the Fed took steps to increase the money supply by an amount that is sufficient to increase the federal funds rate to 1.25 percent."
D)"Today the Fed took a step toward expanding aggregate demand, and this was done by raising the federal funds rate to 1.25 percent."

Question

Quizplus · Accepted Answer

The Federal Reserve influences the federal funds rate indirectly through open-market operations, which involve buying or selling government securities to adjust the supply of reserve balances in the banking system. This, in turn, affects the equilibrium federal funds rate. Choices B, C, and D describe actions or effects that do not directly explain how the Fed influences the federal funds rate.

While a Television News Reporter Might State That "Today the Fed