When the Fed buys government securities in the open market, it:
A) Decreases the excess reserves of the banking system, reducing excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate
B) Increases the excess reserves of the banking system, reducing excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate
C) Decreases the excess reserves of the banking system, reducing excess reserves for overnight loan in the Federal funds market, thus increasing the Federal funds rate
D) Increases the excess reserves of the banking system, raising excess reserves for overnight loan in the Federal funds market, thus lowering the Federal funds rate

Question

Quizplus · Accepted Answer

When the Fed buys government securities, it injects money into the banking system, increasing excess reserves. This increase in reserves leads to more funds available for overnight loans, which typically lowers the Federal funds rate.

When the Fed Buys Government Securities in the Open Market