If the interest rate the Fed targets were below its target the Fed would make open...

If the interest rate the Fed targets were below its target the Fed would

make open market purchases to increase reserves.
		make open market purchase to decrease reserves.
		make open market sales to increase reserves.
		make open market sales to decrease reserves.

Solutions

Expert Solution

The open market operations are conducted to affect the money supply in the market. Open market operations refer to the system under which central bank purchases or sales of government securities in order to expand or contract money in the banking system and influence interest rates.

If the interest rate the Fed targets were below its target the Fed would make open market sales to decrease reserves

To combat inflation the Fed starts selling securities in an attempt to reduce the money supply. The amount of reserves shranks enough to push the federal funds rate as high.

The use of open market operations as a monetary policy tool ultimately helps the Fed pursue its dual mandate like maximizing employment, promoting stable prices, by influencing the supply of reserves in the banking system, which leads to interest rate changes.

Rahul Sunny answered 1 year ago

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