Suppose, at a given federal funds rate, there is an excess supply of reserves in the federal funds market.

Suppose, at a given federal funds rate, there is an excess supply of reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________.

A) sale; increase
B) purchase; increase
C) sale; decrease
D) purchase; decrease

Answer: The correct answer is sale; decrease.

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