Question

What is the Fed funds rate? How is it linked to open market operations? Explain what policy the Fed would undertake in order to lower the Fed funds rate.

Answer 1

Ans:

Federal funds rate is the interest rate at which banks lend balance reserves to other banks on overnight basis.Federal reserve uses the open market operations as a technique to manipulate the federal funds rate.

Open market operations means buying and selling of government securities in the open market thereby expanding or contracting the money supply. In order to implement this technique two type of policies are expansionary monetary policy and contractionary monetary policy.If federal funds rate need to be decreased expansionary monetary policy is enacted and if federal funds rate need to be increased contractionary monetary policy is adopted.

In this case in order to lower the Fed funds rate, Fed would undertake expansionary monetary policy.