Question

In the market for reserves, if the federal funds rate is higher than the interest rate paid on excess reserves by the Federal Reserve System, an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant.

Answer 1

In the market for reserves, if the federal funds rate is higher than the interest rate paid on excess reserves by the Federal Reserve System, an open market purchase INCREASES the SUPPLY of reserves which causes the federal funds rate to fall, everything else held constant.

Step-by-step explanation:

An open market purchase by the Federal Reserve injects money into the economy, increasing the total money supply. An open market purchase happens when the FED buys securities from private banks which increases the reserves of the banks and will lower the federal funds rate.