How does the Fed manage the federal funds rate?
The federal funds rate is determined by banks that lend and borrow reserves to and from each other for very short periods of time, typically overnight. Banks borrow to meet their reserve requirements. To decrease the federal funds rate, the Fed buys government securities from banks, giving the banks more cash reserves to cover their reserve requirements. As a result, the demand for reserves on the federal funds market decreases, decreasing the federal funds rate. To raise the rate, the Fed sells government securities to the banks.
You might also like to view...
Describe alternative forms of capital inflow to finance external deficits and explain why these methods were used in different times?
What will be an ideal response?
Bank ownership of corporate stock is "discouraged" by regulators in
A) the United States. B) the United Kingdom. C) Germany. D) Japan.
Unemployment:
A. can have serious social consequences. B. changes primarily because of macroeconomic forces. C. can create uncertainty about the future. D. All of these are true.
If a natural disaster were to cause a negative long-run supply shock to the economy, once the economy adjusts, the new equilibrium will be at a:
A. higher price level and lower level of output. B. lower price level and lower level of output. C. higher price level and higher level of output. D. lower price level and higher level of output.