Section 4: Short Answer – Answer in no more than six sentences. Bullet point for

Question

Section 4: Short Answer – Answer in no more than six sentences. Bullet point format is acceptable. For math problems show all steps for full credit.

Suppose the board of the Federal Reserve votes to raise interest rates in 2016. The Chairman then decides to execute this using the Fed’s most common policy tool rather than alter the discount rate.

Explain what the Chairman plans to do. Show or describe the steps – cause and effect – between the Fed’s action and the ultimate rise of interest rates.

Explanation / Answer

The fed will buy bonds and securities through open market operations. This will decrease money supply. As a result banks who borrow in federal funds market will have to pay higher interest rates. Since cost of funds rises for banks they will increase interest rates on loans etc.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.