Complete the sentences with the correct terms.

The Fed ___(indirectly / directly)___ controls the money supply through open market operations. For instance, when the Fed buys bonds, this ___(increase / decrease)___ in demand for bonds causes nominal interest rates to ___(decrease / increase)___. When the Fed buys bonds, bank reserves ___(decrease / increase)___, which reduces the need for banks to borrow. This causes the federal funds rate to ___(decrease / increase)___.

Answer:

The Fed indirectly controls the money supply through open market operations. For instance, when the Fed buys bonds this increase in demand for bonds causes nominal interest rates to decrease. When the Fed buys bonds, bank reserves increase which reduces the need for banks to borrow. This causes the federal funds rate to decrease.

Explanation:

The Federal Reserve indirectly controls the money supply when using open market operations to influence the federal funds rate. When the Fed buys bonds, demand for bonds increases, and since there is an inverse relationship between the price of bonds and the interest rate, as the price of bonds rise, the nominal interest rate falls.

Bank reserves increase as a result of open market purchases by the Fed. This increase in bank reserves reduces the need for banks to borrow from each other to meet minimum reserve requirements. As the demand for interbank loans decreases, so does the federal funds rate, which is the price of these interbank loans.

The Federal reserve,  indirectly controls money supply through open market operations. For instance, when Fed buys bonds this increase in demand for bonds causes nominal interest rates to decrease. When Fed buys bonds, bank reserves increase which reduces the need for banks to borrow. This causes the federal funds rate to decrease.

The United States of America's central banking system is called the Federal Reserve System. With the passage of the Federal Reserve Act on December 23, 1913, it was established in response to the need for centralized control of monetary system for prevention of  financial crises following a string of financial panics.

The Federal Reserve's actions and communications to advance maximum employment, price stability, and moderate long-term interest rates—the three economic objectives that the Congress has directed the Federal Reserve to pursue—combine to form monetary policy in the United States.

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