If the Fed conducts an open market sale, the federal funds rate will:

Question

BlackTom AI · Accepted Answer

Open market sale reduces the quantity of reserves in the banking system, so the federal funds rate rises.

1) Relevant concepts:
- The federal funds rate is the overnight interest rate at which banks lend excess reserves to each other.
- The Fed conducts open market operations by buying or selling government securities; these operations change banks’ reserve balances and thus the supply of reserves.
- In the supply–demand framework for reserves, a decrease in reserve supply raises the equilibrium federal funds rate.

2) Step-by-step reasoning:
- The Fed sells Treasury securities to the public (or to banks). Buyers pay for these securities by drawing down their bank deposits.
- When banks or the public pay the Fed, the Fed debits banks’ reserve accounts at the Fed. This reduces the total reserves in the banking system.
- With fewer reserves, banks that need overnight funds face a tighter supply of lendable reserves.
- In the federal funds market, the supply curve of reserves shifts left (decreases) while demand for reserves at given needs is essentially unchanged.
- The intersection of supply and demand moves to a higher interest rate — the federal funds rate increases.

3) (No numeric calculation required; the intermediate step is the reserve decrease causing a leftward shift in supply.)

4) Why the correct answer is correct:
An open market sale is contractionary monetary policy that lowers bank reserves and therefore raises the price of overnight funds (the federal funds rate).

5) Why the other options are incorrect:
- b. become zero: A contractionary action does not drive rates to zero; zero would imply free lending at no cost, which contradicts reduced reserves.
- c. fall: A fall in the federal funds rate would require an increase in reserves (open market purchases), the opposite of a sale.
- d. remain unchanged: Selling securities changes reserves and therefore shifts the supply; unless offset by other Fed actions, the rate will not remain unchanged.

Conclusion: An open market sale causes the federal funds rate to rise; the correct answer is a. rise.

If the Fed conducts an open market sale, the federal funds rate will:单项选择题

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