If the Fed wanted to reduce the federal funds interest rate, it might:
A)increase the discount rate.
B)increase the required reserve ratio.
C)buy government securities.
D)sell government securities.

Question

If the Fed wanted to reduce the federal funds interest rate, it might:
A)​increase the discount rate.
B)​increase the required reserve ratio.
C)​buy government securities.
D)​sell government securities.

Quizplus · Accepted Answer

When the Fed buys government securities, it injects reserves into the banking system. This increases the supply of reserves and thus puts downward pressure on the federal funds interest rate. Therefore, buying government securities is the appropriate action for the Fed to take if it wants to reduce the federal funds rate. A decrease in the federal funds rate can stimulate economic activity by making it cheaper for banks to lend to each other and to their customers.

If the Fed Wanted to Reduce the Federal Funds Interest