Question

When the New York Fed's trading desk sells government securities in the open market, there is

-increase in the federal funds rate

-no change in the federal funds rate

-increase in the discount rate

-decrease in the discount rate

Answer 1

Ans:- 1) increase in the federal funds rate.

When an economy becomes overheated due to inflation, Fed decides to sell government securities to individuals and institutions in order to slow the economy which increases the borrowing costs and interest rates. This is called contractionary monetary policy of Fed which intends to slow the money supply into the economy by decreasing GDP and increasing the federal funds rate which will help in dampen the inflation..