The Federal Reserve influences the level of interest rates in the short run by changing the
A) demand for money through open market operations.
B) demand for money through changes in reserve requirements.
C) supply of money through open market operations.
D) supply of money through changes in stock market operations.

Question

Quizplus · Accepted Answer

The Federal Reserve influences the supply of money through open market operations, which involves buying or selling bonds in the open market. When the Fed buys bonds, it injects money into the system and lowers interest rates; when it sells bonds, it removes money and raises interest rates. Therefore, it is the supply of money, not the demand for money, that is affected by open market operations. Reserve requirements are another tool the Fed can use to influence the money supply, but they are not as commonly used for short-term interest rate targeting. Stock market operations are not directly related to the money supply or interest rates.

The Federal Reserve Influences the Level of Interest Rates in the Short