Before the ﬁnancial crisis of 2008, restrictive monetary policy by the Fed involved
A) raising the target federal funds rate and using an open-market sale of bonds to adjust bank reserves and thereby raise the federal funds rate to hit its target.
B) raising the target federal funds rate and using an open-market purchase of bonds to adjust bank reserves and thereby raise the federal funds rate to hit its target.
C) reducing the target federal funds rate and using an open-market sale of bonds to adjust bank reserves and thereby lower the federal funds rate to hit its target.
D) reducing the target federal funds rate and using an open-market purchase of bonds to adjust bank reserves and thereby lower the federal funds rate to hit its target.

Question

Quizplus · Accepted Answer

Before the financial crisis of 2008, the Fed's restrictive monetary policy involved raising the target federal funds rate and using an open-market sale of bonds to reduce bank reserves and thereby raise the federal funds rate to hit its target. A decrease in bank reserves leads to a decrease in the money supply and a corresponding increase in interest rates.

Before the ﬁNancial Crisis of 2008, Restrictive Monetary Policy by the Fed