ECONOMICS
MONETARY POLICY
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
has an indeterminate effect on the federal funds rate.
|
|
|
lowers the federal funds rate.
|
|
|
has no effect on the federal funds rate.
|
|
|
raises the federal funds rate.
|
Detailed explanation-1: -It is the Federal Reserve’s actions, as a central bank, to achieve three goals specified by Congress: maximum employment, stable prices, and moderate long-term interest rates in the United States (figure 3.1).
Detailed explanation-2: -When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation’s money supply and expands the economy.
Detailed explanation-3: -Holding everything else constant, if the federal funds rate rises, then the demand for excess reserves falls because they have a higher cost. Holding everything else constant, if the federal funds rate falls, then the demand for excess reserves rises because they have a lower cost.
Detailed explanation-4: -If the federal funds rate, or the rate at which banks are willing to lend reserves to each other, equals the rate paid on excess reserves by the Fed, the commercial banks will be indifferent between the two options.