What happens after the Fed buys securities on the open market (assume the demand for reserves...
What happens after the Fed buys securities on the open market (assume the demand for reserves is downward sloping)?
| A. |
Supply of reserves shifts leftward and federal funds rate increases |
|
| B. |
Supply of reserves shifts rightward and federal funds rate declines |
|
| C. |
Supply of reserves shifts leftward and federal funds rate declines |
|
| D. |
Supply of reserves shifts rightward and federal funds rate increases |
Homework Answers
Answer
Option
B. Supply of reserves shifts rightward and federal funds rate declines
====
The Fed buys securities on the open market which increases reserves in the market and as the supply of reserves shifts to the right which decreases Federal fund rate in the reserve market as it is the interest rate charged by banks to other banks in the Federal fund market so it is called Federal fund rate.
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