In order to move the federal funds rate to the level it desires, the Fed must
A) first change the discount rate to the desired federal funds rate.
B) specify the interest rate on previously issued government bonds.
C) adjust the money supply to achieve the target federal funds rate.
D) limit the amount of bank lending activity.

Question

Quizplus · Accepted Answer

The Federal Reserve uses open market operations, such as buying or selling government securities, to adjust the money supply in order to achieve the target federal funds rate. By buying securities, the Fed injects cash into the market, increasing the supply of money and lowering interest rates; by selling securities, the Fed reduces the supply of money and raises interest rates. Changing the discount rate (choice A) only affects the interest rate that banks pay to borrow money from the Fed, and does not directly impact the federal funds rate. Specifying the interest rate on previously issued government bonds (choice B) is not within the Fed's control, as the interest rate on bonds is set by the market. Limiting bank lending activity (choice D) could affect the money supply and interest rates indirectly, but it is not a direct tool used by the Fed to adjust the federal funds rate.

In Order to Move the Federal Funds Rate to the Level