Scenario: The following figure shows the federal funds market. Assume that the market of reserves is in equilibrium at $500 billion in reserves and a 3 percent federal funds rate.
-Refer to the scenario above.If the Fed completes an open market sale of bonds that changes the quantity of reserves by $400 billion,then the federal funds rate will ________.
A) increase to 5 percent
B) decrease to 1 percent
C) remain at 3 percent
D) more information is needed to determine the new federal funds rate
Correct Answer:
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