Question

To reduce the Federal Funds rate the Federal Reserve would need to

	purchase bonds
	sell bonds
	increase the reserve requirements ratio
	none of the above

Answer 1

Option 1

purchase bonds

A federal fund rate is a rate charged by banks to each other for overnight borrowings and it is determined by the bank borrowing market demand and supply. To decrease the rate the supply of money should be increased or demand should be decreased in the market.

The Fed can increase the money supply in the economy so the banks demand the funds in the market decreases and the federal fund rate decreases.

To increase money supply fed purchase bonds so the money goes into the economy and bonds to the Fed.

To decrease it sells bonds or increase reserve ratio.