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Suppose the Fed has a current federal funds rate target of 3% but wishes to achieve a new target...

Question:

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...

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Loanable Funds: Definition & Theory

from Introduction to Business: Homework Help Resource

Chapter 25 / Lesson 29
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