Question

Complete the sentences with the correct terms. Some terms may be used more than once, and...

Complete the sentences with the correct terms. Some terms may be used more than once, and some may not be used at all.

The Fed ....... controls the money supply through open market operations. For instance, when the Fed buys bonds, this ...... in demand for bonds causes nominal interest rates to ...... . When the Fed buys bonds, bank reserves ........, which reduces the need for banks to borrow. This causes the federal funds rate to ....... .

Decrease, indirectly, increase, directly

Homework Answers

Answer #1

The federal reserve indirectly controls the money supply through open market operations

Is the federal reserve purchase bonds in the open market, it will increase the demand for bonds.

demand curve will be shifted to the right and this causes the nominal interest rate to decrease

At the same time when the bonds are purchased, the reserves available at the bank increase

Banks are now required to borrow less because they have excess reserves this causes the federal funds rate to decrease.

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