In the short run, to decrease the interest rate the Federal Reserve ________ the quantity of money by ________ government securities.
A) increases; selling
B) increases; buying
C) decreases; selling
D) decreases; buying
E) None of the above answers are correct because in the short run the Federal Reserve cannot change the interest rate.

Question

Quizplus · Accepted Answer

To decrease the interest rate in the short run, the Federal Reserve needs to increase the quantity of money in the economy. One way to do so is by buying government securities from banks, which increases their reserves and allows them to lend more money. Increased lending leads to higher demand for credit, which reduces the interest rate. Therefore, the correct answer is B, as the Fed increases the quantity of money by buying government securities.

In the Short Run, to Decrease the Interest Rate the Federal