ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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sell bonds, which increases the money supply and lowers interest rates.
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sell bonds, which decreases the money supply and raises interest rates.
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it borrows from member banks, which increases the money supply.
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it lends money to member banks, which decreases the money supply.
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Detailed explanation-1: -A higher fed funds rate means more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money. The banks pass on higher borrowing costs by raising the rates they charge for consumer loans.
Detailed explanation-2: -The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. Conversely, by raising the banks’ reserve requirements, the Fed can decrease the size of the money supply.
Detailed explanation-3: -The Federal Open Market Committee (FOMC) sets monetary policy in the United States, and the Fed’s New York trading desk uses open market operations to achieve that policy’s objectives. To increase the money supply, the Fed will purchase bonds from banks, which injects money into the banking system.
Detailed explanation-4: -Open Market Operations If the FOMC lowered its target for the federal funds rate, then the trading desk in New York would buy securities on the open market to increase the supply of reserves. The Fed paid for the securities by crediting the reserve accounts of the banks that sold the securities.