Before the ﬁnancial crisis of 2008, when the Federal Reserve Banks decided to buy government bonds from commercial banks and the general public, the supply of reserves in the federal funds market
A) increased and the Federal funds rate decreased.
B) increased and the Federal funds rate increased.
C) decreased and the Federal funds rate decreased.
D) decreased and the Federal funds rate increased.

Question

Quizplus · Accepted Answer

When the Federal Reserve Banks buy government bonds from commercial banks and the general public, the reserves in the banking system increase, leading to an increase in supply of reserves in the federal funds market. This results in a decrease in the federal funds rate, as banks have excess reserves to lend to each other at a lower interest rate.

Before the ﬁNancial Crisis of 2008, When the Federal Reserve