Suppose the Fed has a current federal funds rate target of 3% but wishes to achieve a new target of 2%. This requires an open market _ _ _ _ _ , which will _ _ _ _ _ _ the supply of bank reserves in the banking system.
A. sale; decrease
B. sale; increase
C. purchase; decrease
D. purchase; increase
The Overnight Rate:
The overnight rate is the rate at which banks borrow from each other for the duration of one day, usually between the end of day and the opening in the next morning, i.e., overnight. Changes in overnight rate affect all other interest rates in the economy.
Answer and Explanation:
The answer is D.
To reduce the overnight rate, the Fed must increase the supply of funds in the overnight market. To do so, the Fed must purchase...
See full answer below.
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Introduction to Business: Homework Help ResourceChapter 25 / Lesson 29