Question

If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by a. selling bonds. This selling would increase the money supply. b. buying bonds. This buying would increase the money supply. c. buying bonds. This buying would reduce the money supply. d. selling bonds. This selling would reduce the money supply.

Answer 1

Answer:

The correct answer is option b.

Explanation:

If the federal fund's rates were above the targeted rate, the Fed would need to move it towards the targeted rate. To move the interest rate towards the targeted rate, the government would need to increase the money supply. This can be done by buying bonds. When the Fed buys bonds they pay for it, this causes the money supply to increase. As the supply curve shifts to the right, the interest rate will fall down.