Describe how the Fed uses open market operations to change ...

[ap345]

Describe how the Fed uses open market operations to change short-term and long-term interest rates.
 
  What will be an ideal response?

Question 2

Increasing opportunity cost along a bowed-out production possibilities frontier occurs because
 
  A) of inefficient production.
  B) of the scarcity of factors of production.
  C) of ineffective management by entrepreneurs.
  D) some factors of production are not equally suited to producing both goods or services.

[GCabra]

Answer to Question 1

The Fed tries to achieve a target level for the federal funds rate by using open market operations. If it wants to lower the federal funds rate, it will buy Treasury bills using open market operations. This purchase will inject the banking system with reserves. The increased supply of reserves will lower the overnight loan rate on these reserves, which is called the federal funds rate. Changes in the federal funds rate will usually result in changes in the interest rates on other short-term financial assets such as Treasury bills, and eventually affect longer-term rates such as the rate of corporate bonds and mortgages. However, the effect on these longer-term rates is usually smaller than the impact on short-term rates and occurs with a lag.

Answer to Question 2

D