When the Federal Reserve decreases the federal funds target rate, the lower rate is achieved through

Question

a. sales of government bonds, which reduces interest rates and causes people to hold less money.
b. purchases of government bonds, which reduces interest rates and causes people to hold less money.
c. purchases of government bonds, which reduces interest rates and causes people to hold more money.
d. sales of government bonds, which reduces interest rates and causes people to hold more money.

Answer 1

When the Federal Reserve decreases the federal funds target rate, the lower rate is achieved through:

c. purchases of government bonds, which reduces interest rates and causes people to hold more money.

When the Fed buys government bonds, it increases the reserves in the banking system, which lowers the federal funds rate. This, in turn, makes borrowing cheaper, encouraging spending and investment, and typically leads to individuals and businesses holding more money relative to their transactions.