In the short run, if the Fed wants to raise the federal funds rate, it
A) instructs large commercial banks to sell government securities in the open market.
B) instructs the New York Fed to sell government securities in the open market.
C) tells large commercial banks to raise their interest rates.
D) instructs the New York Fed to sell government securities in the foreign exchange market.
E) instructs the New York Fed to buy government securities in the open market.

Question

Quizplus · Accepted Answer

To raise the federal funds rate, the Fed typically instructs the New York Fed to sell government securities in the open market. This increases the supply of reserves available to banks, which drives down the federal funds rate. Banks then have an incentive to lend out their excess reserves to other banks, which raises the federal funds rate back up. This helps to regulate the overall level of interest rates in the economy. Therefore, choice B is the best answer.

In the Short Run, If the Fed Wants to Raise