Suppose on any given day the prevailing equilibrium federal funds rate is above the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target 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

If the prevailing equilibrium federal funds rate is above the Federal Reserve's federal funds target rate, then there is excess supply of reserves, which puts downward pressure on the federal funds rate. To bring the federal funds rate up to the target level, the Federal Reserve needs to decrease the supply of reserves, which can be achieved through an open market purchase of Treasury securities. Therefore, the appropriate action for the Federal Reserve to take is a dynamic open market purchase, making option D the correct choice.

Suppose on Any Given Day the Prevailing Equilibrium Federal Funds