Before the ﬁnancial crisis of 2008, if the Fed bought government securities in the open market, it
A) decreased the excess reserves of the banking system, reducing excess reserves for overnight loans in the Federal funds market, thus lowering the Federal funds rate.
B) increased the excess reserves of the banking system, reducing excess reserves for overnight loans in the Federal funds market, thus lowering the Federal funds rate.
C) decreased the excess reserves of the banking system, reducing excess reserves for overnight loans in the Federal funds market, thus increasing the Federal funds rate.
D) increased the excess reserves of the banking system, raising excess reserves for overnight loans in the Federal funds market, thus lowering the Federal funds rate.

Question

Quizplus · Accepted Answer

When the Fed buys government securities in the open market, it pays for these securities by adding funds to the banks' reserves. This action increases the excess reserves of the banking system. With more excess reserves available, banks have more funds to lend in the Federal funds market, which typically leads to a decrease in the Federal funds rate due to the increased supply of funds.

Before the ﬁNancial Crisis of 2008, If the Fed Bought