Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level,then the appropriate action for the Federal Reserve to take is a ________ open market ________,everything else held constant.
A)defensive;sale
B)defensive;purchase
C)dynamic;sale
D)dynamic;purchase

Question

Quizplus · Accepted Answer

When there is an excess demand for reserves, the federal funds rate tends to increase. To keep the rate at its current level, the Federal Reserve needs to inject reserves into the system by purchasing securities in the open market, thereby increasing the supply of reserves and bringing the rate back down. This is known as a defensive purchase, as it is meant to defend the current rate from rising. A defensive sale, on the other hand, would decrease the reserves available and push the rate up even further. Dynamic open market operations involve a more active approach to monetary policy and are not typically used to maintain a specific target rate in the federal funds market.

Suppose on Any Given Day There Is an Excess Demand