When the Federal Reserve increases the Federal Funds target rate,it achieves this target by
A)purchasing government bonds.This action will reduce investment and shift aggregate demand to the right.
B)purchasing government bonds.This action will increase investment and shift aggregate demand to the right.
C)selling government bonds.This action will reduce investment and shift aggregate demand to the left.
D)selling government bonds.This action will increase investment and shift aggregate demand to the left.

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the Federal Funds target rate, it achieves this target by selling government bonds. This action reduces the money supply and increases interest rates, which in turn reduces investment and shifts aggregate demand to the left. Therefore, option C is the correct choice. Option D is incorrect because selling government bonds increases interest rates, which reduces investment and shifts aggregate demand to the left. Options A and B are also incorrect because they describe the opposite effect of what actually happens when the Federal Reserve increases the target rate.

When the Federal Reserve Increases the Federal Funds Target Rate,it