To prevent the interest rate from increasing, the Fed accommodates an increase in aggregate demand by which of these methods?
A)decreasing the supply of reserves
B)increasing the supply of reserves
C)not changing the supply of reserves
D)decreasing the quantity supplied of reserves

Question

Quizplus · Accepted Answer

By increasing the supply of reserves, the Fed can accommodate an increase in aggregate demand without causing interest rates to rise. This is because an increase in reserves lowers the federal funds rate, which is the interest rate at which banks lend reserves to each other. Lowering the federal funds rate also lowers other short-term interest rates, such as the prime rate and mortgage rates, which helps to stimulate borrowing and spending in the economy.

To Prevent the Interest Rate from Increasing, the Fed Accommodates