Which of the following is an accurate description of the steps by which the FOMC causes the actual federal funds rate to rise into its target range when it votes to raise the federal funds rate target?
A) IOER is increased → this affects depository institutions that can borrow and lend in the federal funds market AND are paid interest on their deposits with the Fed → this pushes the federal funds rate to the top of the target range → federal funds rate rises into this new range.
B) IOER is decreased → this affects depository institutions that can borrow and lend in the federal funds market AND are paid interest on their deposits with the Fed → this keeps the federal funds rate above the bottom of the target range → federal funds rate rises into this new range.
C) IOER is increased → this affects depository institutions that can borrow and lend in the federal funds market BUT ARE NOT paid interest on their deposits with the Fed → this pushes the federal funds rate to the top of the target range → federal funds rate rises into this new range.
D) IOER is decreased → this affects depository institutions that can borrow and lend in the federal funds market BUT ARE NOT paid interest on their deposits with the Fed → this keeps the federal funds rate above the bottom of the target range → federal funds rate rises into this new range.

Question

Quizplus · Accepted Answer

When the FOMC votes to increase the federal funds rate target, they typically increase the interest rate paid on reserves (IOER). This affects depository institutions that can borrow and lend in the federal funds market and are paid interest on their deposits with the Fed. As a result, these institutions have less incentive to lend out their reserves in the federal funds market and instead hold onto them, pushing the federal funds rate to the top of the new target range. As the federal funds rate rises into the new range, other short-term interest rates also tend to rise, affecting borrowing and lending throughout the economy.

Which of the Following Is an Accurate Description of the Steps