Suppose,at a given federal funds rate,there is an excess supply of 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

DWhen there is an excess supply of reserves in the federal funds market, the federal funds rate tends to decrease because banks have more reserves than they need and thus lend them at a lower rate. To maintain the federal funds rate at the current level, the Fed would sell bonds in an open market operation to absorb the excess reserves, which helps to keep the rate from falling. If the Fed does nothing, the excess supply of reserves would lead to a decrease in the federal funds rate as banks try to lend out their excess reserves.

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