Question

Suppose on any given day the prevailing equilibrium federal funds rate is below the Federal​ Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target​ level, then the appropriate action for the Federal Reserve to take is a​ ________ open market​ ________, everything else held constant.

Answer 1

Answer:

The correct answer is: defensive; purchase.

Explanation:

The federal funds rate is the rate at which the banks lend to each other.

If the federal funds rate is below the target rate, the federal reserve needs to increase the federal funds rate. The fed can use several methods such as increasing the discount rate, reserve requirement rate.

The fed can also increase the federal funds rate by purchasing securities in the open market.

This will reduce the reserves with the banks, the reduction in availbility of credit will increase the federal funds rate.