Question

If the Fed carries out an open market operation and sells U.S. government securities, as long as the federal funds interest rate remains within the corridor the federal funds rate ________ and the quantity of reserves ________. Group of answer choices rises; decreases falls; increases falls; decreases rises; increases

Answer 1

rises; decreases

Step-by-step explanation:

When the Fed sells US securities, it is engaging in a contractionary monetary policy. This means that they are trying to cool down the economy and lower inflation rate by reducing the money supply. This will lead to an increase in the federal funds rate and the whole economy's interest rates.

Since the Fed absorbs money from the banks and other investors, the quantity of banks' reserves decreases, which leads to less loans and higher interest rates charged.