When the Federal Reserve seeks to contract the money
Supply, it may

Question

Quizplus · Accepted Answer

When the Federal Reserve seeks to contract the money supply, it wants to decrease the amount of money in circulation in order to combat inflation. To do this, the Fed can sell securities on the open market. This reduces the amount of money held by banks and individuals, making it more expensive to borrow money. This also leads to an increase in the targeted federal funds rate, which is the interest rate that banks charge each other for overnight loans. Therefore, the correct choice is A, since it involves the sale of securities and an increase in the targeted federal funds rate.

When the Federal Reserve Seeks to Contract the Money