The Fed can regularly influence and change the risk-free rate of financial investments through its:

Question

Quizplus · Accepted Answer

The Fed can influence the risk-free rate of financial investments through its open market operations, where it buys or sells government securities to increase or decrease the supply of money in the economy. This, in turn, affects the interest rates. Therefore, option A is the correct answer.

Quantitative easing (option B) is a monetary policy that involves buying long-term government or corporate bonds to increase the money supply and lower interest rates. It can impact the risk-free rate indirectly but not as directly as open market operations.

Required reserve ratio (option C) is the proportion of deposits that banks are required to keep as reserves with the central bank. Changing the reserve ratio can impact the money supply, but it does not directly affect the risk-free rate.

Bank supervision (option D) is aimed at ensuring the safety and stability of the banking system. While it can indirectly impact the interest rates, it is not a direct tool for influencing the risk-free rate.

The Fed Can Regularly Influence and Change the Risk-Free Rate