When the Fed wants to lower the Federal funds rate, it:
A) Increases the discount rate
B) Increases the reserve ratio
C) Buys bonds from banks and the public
D) Sells bonds to banks and the public

Question

Quizplus · Accepted Answer

When the Fed wants to lower the Federal funds rate, they can buy bonds from banks and the public. By purchasing bonds, the Fed increases the money supply in the economy, which lowers interest rates and encourages borrowing and spending. This allows banks to have more money to lend, which drives down the Federal funds rate. Therefore, C is the correct answer. Increasing the discount rate (A) would have the opposite effect and make lending more expensive, while increasing the reserve ratio (B) would decrease the amount of money banks have available to lend, thus making borrowing more expensive. Selling bonds (D) would also decrease the money supply, thus increasing interest rates and making borrowing more expensive.

When the Fed Wants to Lower the Federal Funds Rate