Question

If the federal funds rate is below its target, the Fed is likely to want to ___ securities in the open market, which will cause the federal funds rate to ____.

-buy, increase

-buy, decrease

-sell, increase

Answer 1

option 3

Sell, increase

-------

A federal fund rate is a rate at which commercial banks borrow money from each other, and it depends on the money supply if money supply decreases the rate increases and vice verse.

A buy of securities means the securities are brought from banks and money sent to banks.

A sell of securities means the securities sold to banks and the money is taken from then.

It means a buy increases the money supply and a sell decreases the money supply.

The Fed required to increase the Federal fund rate which requires to decrease the money supply. The Fed will sell securities to decrease the money supply and increase the Federal fund rate.