If the Fed desired to reduce the federal funds rate,
A)it would conduct an open market sale, reducing reserve supply.
B)it would conduct an open market purchase, increasing reserve supply.
C)it would conduct an open market sale, increasing reserve demand.
D)it would conduct an open market purchase, reducing reserve demand.

Question

Quizplus · Accepted Answer

When the Fed conducts an open market purchase, it injects new money into the economy which increases the supply of reserves. This increase in reserve supply makes it cheaper for banks to borrow from each other, leading to a decrease in the federal funds rate.

If the Fed Desired to Reduce the Federal Funds Rate