The Fed can regularly inﬂuence and change the risk-free rate of ﬁnancial investments through its
A) open-market operations.
B) quantitative easing.
C) required reserve ratio.
D) bank supervision.

Question

Quizplus · Accepted Answer

The Fed can influence and change the risk-free rate of financial investments through its open-market operations, where it buys or sells government securities in the open market. This affects the supply and demand for such securities and ultimately changes their yield, which impacts the risk-free rate. Quantitative easing (B) is also a form of open-market operations, where the Fed buys longer-term assets to stimulate the economy. The required reserve ratio (C) is the amount of reserves banks are required to hold against deposits, and changing it affects banks' ability to lend and the money supply, but it does not directly impact the risk-free rate. Bank supervision (D) refers to the Fed's oversight of banks to ensure they are following regulations and conducting their operations in a safe and sound manner, but it does not directly impact the risk-free rate.

The Fed Can Regularly Inﬂuence and Change the Risk-Free Rate