When the Federal Reserve Banks decide to buy government bonds from banks and the public, the...
When the Federal Reserve Banks decide to buy government bonds from banks and the public, the supply of reserves in the federal funds market _____.
Multiple Choice
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increases and the federal funds rate decreases
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increases and the federal funds rate increases
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decreases and the federal funds rate increases
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decreases and the federal funds rate decreases
Homework Answers
The correct option is- A.the supply of reserves in federal funds market increases and federal funds rate decreases.
Whenever the Federal Bank (Fed) buys the government bonds from the banks, the amount of reserves increases since Fed pays to the banks by showing it as a deposit in their accounts maintained at Fed.
Moreover,this forces the banks to lend this extra amount of money to each other and this in turn decreases the Federal funds rate (i.e. the rate at which the banks lend Federal funds reserves to each other on overnight basis).
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