Question

Suppose, at a given federal funds rate, there is an excess supply of reserves in the federal funds market. if the fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. if the fed does nothing, however, the federal funds rate will ________.

Answer 1

Then it should undertake an open market sale of bonds, everything else held constant. If the federal government does nothing, the fed funds rate will decrease.The reason for this is that putting an opportunity for the open market to purchase bonds will result in an excess and in maintaining the excess. However, doing nothing, will result in a decrease.