When the Fed purchases bonds, the Fed:
A)reduces the reserves and the federal funds rate increases.
B)increases the reserves and the federal funds rate decreases.
C)reduces the reserves and the federal funds rate decreases.
D)increases the reserves and the federal funds rate increases.

Question

Quizplus · Accepted Answer

When the Federal Reserve (Fed) purchases bonds, it pays for these bonds by adding credit to the banks' reserves, which increases the total reserves in the banking system. With more reserves available, banks have more capacity to lend to each other overnight at a lower rate, leading to a decrease in the federal funds rate.

When the Fed Purchases Bonds, the Fed