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Question

If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate back towards its target bya.buying bonds. This buying would increase the money supply.b.buying bonds. This buying would reduce the money supply.c.selling bonds. This selling would increase the money supply.d.selling bonds. This selling would reduce the money supply.

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Answered By Expert

Glen

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Solution By Steps

Step 1: Identify the Situation

If the federal funds rate is above the target set by the Federal Reserve, it means the rate is too high.

Step 2: Determine the Correct Action

To bring the rate back towards its target, the Fed needs to decrease the rate, which means increasing the money supply.

Step 3: Choose the Correct Option

The correct action to increase the money supply and lower the federal funds rate is by buying bonds.

Final Answer

a. buying bonds. This buying would increase the money supply.

Key Concept

Monetary Policy

Key Concept Explanation

In monetary policy, central banks like the Federal Reserve use tools like buying or selling bonds to adjust the money supply in the economy, influencing interest rates such as the federal funds rate. Buying bonds injects money into the economy, increasing the money supply and lowering interest rates.