Open market purchase of government securities by the Fed increases the federal funds rate.

Question

Quizplus · Accepted Answer

The opposite is true. When the Fed purchases government securities from the open market, it increases the money supply and lowers the federal funds rate (the rate at which banks lend to each other overnight). This is because banks now have more reserves to lend, making borrowing cheaper and more attractive for other banks. On the other hand, when the Fed sells government securities to the open market, it decreases the money supply and raises the federal funds rate, as banks have less reserves to lend and must charge higher interest rates to compensate for the shortage.

Open Market Purchase of Government Securities by the Fed Increases