If the Fed wants to shift toward a more expansionary policy, it often announces that it is going to change the federal funds interest rate. The Fed controls the federal funds interest rate
A) by imposing legal restrictions that prohibit exchanges at interest rates other than the ones designated by the Fed.
B) by having the U.S. Treasury fix this interest rate
C) through its policy of open market operations.
D) by altering the size of the federal budget deficit or surplus.

Question

Quizplus · Accepted Answer

The Fed controls the federal funds interest rate through its policy of open market operations. This involves buying or selling U.S. government securities on the open market, which affects the supply of and demand for reserves in the banking system. When the Fed buys securities, it injects reserves into the system, which lowers the federal funds rate. When it sells securities, it drains reserves from the system, which increases the federal funds rate.

If the Fed Wants to Shift Toward a More Expansionary