Question

Interest rates are currently too high according to the Federal Reserve's economic plan. Using the model...

Interest rates are currently too high according to the Federal Reserve's economic plan. Using the model for liquidity preference, which of the below Federal Reserve policies will decrease interest rates?

print less money

increase the reserve ratio

increase the discount rate

buy bonds

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Answer #1

The Fed can affect the money supply by conducting open market operations, which affects the federal funds rate. In open operations, the Fed buys and sells government securities in the open market. If the Fed wants to increase the money supply, it buys government bonds. This supplies the securities dealers who sell the bonds with cash, increasing the overall money supply.

So if the government buy bonds , this will lead to higher money supply . Lm curve will shift rightwards in ISLM model and interest rate will fall and output will rise .

Hence ( 4) part is a correct answer

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