when the Federal Reserve banks decide to buy government bonds from banks and the

Question

when the Federal Reserve banks decide to buy government bonds from banks and the public, the supply of reserves in the federal funds market:

a)decreases and the Federal Reserve funds rate decreases

b)increases and the Federal Reserve funds rate decrease

c)increase and the Federal Reserve funds rate increase

d)decrease and the Federal Reserve funds rate increase

when the Federal Reserve banks decide to buy government bonds from banks and the public, the supply of reserves in the federal funds market: decreases and the Federal Reserve funds rate decreases increases and the Federal Reserve funds rate decrease increase and the Federal Reserve funds rate increase decrease and the Federal Reserve funds rate increase

Explanation / Answer

When the Fed buys government bonds or securities from the public and banks, it injects money into the economy. This increases the money supply.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Further, due to excess supply of money in the economy the Fed fund rate ( the rate at which Fed lends ) decreases.

Thus, the correct option is B

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