If the Fed carries out an open market operation and buys U.S.government securities, the federal funds rate ________ and the quantity of reserves ________.
A) falls; increases
B) rises; increases
C) falls; decreases
D) rises; does not change
E) rises; decreases

Question

Quizplus · Accepted Answer

When the Fed buys U.S. government securities in the open market, the demand for these securities increases, causing their price to rise and their yield (interest rate) to fall. As a result, the federal funds rate, which is the rate at which banks lend to each other overnight, falls as well. Since banks now have more securities, and less cash, their quantity of reserves decreases.

If the Fed Carries Out an Open Market Operation and Buys