Suppose,at a given federal funds rate,there is an excess demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level,then it should undertake an open market ________ of bonds,everything else held constant. If the Fed does nothing,however,the federal funds rate will ________.
A)sale;increase
B)purchase;increase
C)sale;decrease
D)purchase;decrease

Question

Quizplus · Accepted Answer

If there is excess demand for reserves, then the Fed needs to supply more reserves to the market which can be done by purchasing bonds in an open market operation. This will increase the supply of reserves and reduce the federal funds rate, keeping it at the same level as desired. If the Fed does nothing, then the excess demand for reserves will push up the federal funds rate. Therefore, the Fed needs to undertake a bond purchase to keep the federal funds rate stable.

Suppose,at a Given Federal Funds Rate,there Is an Excess Demand