When the Fed follows its federal funds interest-rate targeting procedure and sells securities:
A) The Fed funds rate tends to decline
B) The Fed funds rate tends to rise
C) It must immediately replenish its supply of securities
D) The stock market tends to rise
E) None of the above

Question

Quizplus · Accepted Answer

When the Federal Reserve sells securities, it effectively reduces the amount of reserves banks have available to lend to each other. This reduction in supply of reserves leads to an increase in the federal funds rate, as banks are willing to pay more to borrow reserves to meet their reserve requirements.

When the Fed Follows Its Federal Funds Interest-Rate Targeting Procedure