If the Fed wanted to reduce the federal funds interest rate, it might:

Question

Quizplus · Accepted Answer

If the Fed wants to reduce the federal funds interest rate, it would buy government securities. This injects reserves into the banking system, lowering the demand for federal funds loans and pushing down the interest rate.

Alternatively, the Fed could also pay higher interest on banks' reserves (option E). This also increases the supply of reserves, reducing the demand for federal funds loans and pushing down the interest rate.

If the Fed Wanted to Reduce the Federal Funds Interest