Question

If the FOMC directs the Federal Reserve trading desk to loosen credit, which of the following will happen?

А) The trading desk will engage in repurchase agreements with banks and cash reserves will be injected into the banking system
B) The trading desk will engage in reverse repurchase agreements with banks and cash reserves will be injected into the banking system
C) The trading desk will engage in repurchase agreements with banks and cash reserves will be drained from the banking system
D) The trading desk will engage in reverse repurchase agreements with banks and cash reserves will be drained from the banking system

Answer 1

Answer: If the FOMC directs the Federal Reserve trading desk to loosen credit, the trading desk will engage in repo's with banks, injecting reserves into the banking system. This should lower the Fed Funds Rate between banks since there are more reserves available.

Explanation: During prolonged periods of economic recession, interest rates can be expected to. Decrease.