If the Fed wants to lower the federal funds rate through open market operations,it will ________.
A) sell bonds
B) buy bonds
C) increase the quantity of required reserves
D) increase the interest rate paid on borrowed reserves held at the Fed

Question

Quizplus · Accepted Answer

To lower the federal funds rate, the Fed would want to increase the supply of reserves available in the banking system, which can be achieved by buying government securities on the open market. When the Fed buys these securities from banks, it pays for them by crediting the bank's reserve account at the Fed, effectively increasing the amount of reserves available for lending in the system. This excess supply of reserves leads to downward pressure on the federal funds rate. Selling bonds would have the opposite effect, reducing the supply of reserves and putting upward pressure on interest rates. Increasing the quantity of required reserves or the interest rate paid on borrowed reserves would have different effects on the banking system, but they would not directly lead to a lower federal funds rate.

If the Fed Wants to Lower the Federal Funds Rate