By using open market operations, the Federal Reserve
A) adjusts the supply of reserves to keep the federal funds interest rate equal to its target.
B) controls banks' demand for reserves, thereby keeping the federal funds rate equal to its target.
C) adjusts the demand of reserves to keep bank rates in line with the federal funds rate target.
D) adjusts the supply and demand of reserves to keep the federal funds interest rate equal to its target.
E) None of the above answers is correct.
Question 2
In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. If there is no Ricardo-Barro effect and the government now runs a balanced budget,
A) the interest rate will increase from 4 percent to 6 percent.
B) there is a surplus of investment funds and the interest rate falls to 4 percent.
C) there is shortage of investment funds of 0.4 trillion.
D) the equilibrium interest rate is 6 percent and investment is 1.6 trillion.
E) the equilibrium interest rate is 4 percent and investment is 1.8 trillion.
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