"As the Fed Chases Inflation, Critics Shout, 'Faster!'" "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "...the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake."
Www)nytimes, 7/1/2004
By increasing the federal funds target, the Fed will ________ reserves and ________ the quantity of money.
A) increase; increase
B) decrease; decrease
C) decrease; increase
D) increase; decrease

Question

Quizplus · Accepted Answer

By increasing the federal funds target, the Fed effectively makes it more expensive for banks to borrow money from each other overnight. This action tends to decrease bank reserves because banks will borrow less due to the higher cost. With fewer reserves, banks have less base money to multiply through the fractional reserve banking system, leading to a decrease in the overall quantity of money in the economy.

"As the Fed Chases Inflation, Critics Shout, 'Faster!'" "For Weeks