When the Fed takes action to change nominal interest rates, it does so by
A)buying and selling bonds.
B)mandating that banks change the prime rate.
C)recommending that the president change the interest rate.
D)recommending that Congress change the interest rate.
E)increasing the required reserve ratio.

Question

Quizplus · Accepted Answer

The Fed changes nominal interest rates by buying and selling bonds in the open market, which affects the supply and demand for bonds and ultimately the interest rate. This is known as open market operations. The other choices are incorrect because the Fed does not directly mandate or recommend changes to the prime rate or interest rate set by the President or Congress, and changing the required reserve ratio affects the money supply but not necessarily nominal interest rates.

When the Fed Takes Action to Change Nominal Interest Rates