Question content area

Part $1$

In response to problems in financial markets and a slowing$$ economy, the Federal Open Market Committee$($FOMC$)$ began lowering its target for the federal funds rate from $5\mathrm{.}25$ percent in September $2007.$ Over the next$$ year, the FOMC cut its federal funds rate target in a series of steps. Writing in the New York

Times$,$

economist Steven Levitt$$ observed,

$"$The Fed has been pouring more money into the banking system by cutting the target federal funds rate to $0$ to $0\mathrm{.}25$ percent in December$2008."$

$$Source: Steven D$.$ Levitt, "The Financial Meltdown Now and$$ Then," New York

Times$,$

May$12,2009.$

What is the relationship between the federal funds rate falling and the money supply$$ increasing?

A$.$

Cutting the federal funds rate increases bank$$ reserves, which increases the money supply.

B$.$

Cutting the federal funds rate increases$$ saving, which increases the money supply.

C$.$

Cutting the federal funds rate increases the money supply.

D$.$

To decrease the federal funds$$ rate, the Fed must increase the money supply.$$

Part $2$

How does lowering the target for the federal funds rate$$ "pour money" into the banking$$ system?

A$.$

To increase the money$$ supply, the Fed sells bonds on the open$$ market, which increases bank reserves.

B$.$

To increase the money$$ supply, the Fed buys bonds on the open$$ market, which increases bank reserves.

C$.$

To increase the money$$ supply, the Fed decreases$$ taxes, which increases consumer spending.

D$.$

To increase the money$$ supply, the Fed increases government$$ spending, which increases aggregate demand.