If the output gap is positive, then the Federal Reserve will use its floor framework to _____ the interest on excess reserves, borrow _____ money from financial institutions to set the lower bound for the federal funds rate, and _____ the discount rate to set the upper bound for the federal funds rate.
A)lower; less; decrease
B)lower; less; increase
C)raise; more; increase
D)raise; more; decrease

Question

Quizplus · Accepted Answer

When the output gap is positive, indicating an overheating economy, the Federal Reserve aims to cool down the economy by tightening monetary policy. This involves raising the interest on excess reserves to encourage banks to hold onto their reserves, borrowing more money from financial institutions to increase the supply of reserves (thus raising the lower bound of the federal funds rate), and increasing the discount rate to make borrowing from the Fed more expensive, setting a higher upper bound for the federal funds rate.

If the Output Gap Is Positive, Then the Federal Reserve