Federal monetary policy

Assume the U.S. Federal Reserve system (the Fed) has decided to lower interest rates in the economy. To carry out this policy, the Fed will most likely: A. sell securities. B. buy securities. C. increase required reserve ratios.

why C is not correct?


Increasing the reserve requirement effectively reduces the money supply. When the supply is reduced, the price (interest rate) increases.

looks like answer B could work also.

Buy securities --> reduce money balance —> interest rate decrease as security prices go up.

i think b IS the answer nicolas…

If the Fed buys securities, this increases the money supply (they pay for something, thus putting more money into the system). The money supply increases and interest rates decline.

Thanks guys!

My pleasure.