A news website might have this headline: “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent.” A more detailed account of the Fed’s action would say: “Today the Fed told its bond traders to sell enough bonds in open-market operations to make the federal funds rate decrease to 5.25 percent.” “Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount.” “Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent.” “Today the Fed told its bond traders to buy enough bonds in open-market operations to make the federal funds rate decrease to 5.25 percent.”

A news website might have this headline: “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent.” A more detailed account of the Fed’s action would say: “Today the Fed told its bond traders to sell enough bonds in open-market operations to make the federal funds rate decrease to 5.25 percent.” “Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount.” “Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent.” “Today the Fed told its bond traders to buy enough bonds in open-market operations to make the federal funds rate decrease to 5.25 percent.”

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter13: The Federal Reserve System

Section: Chapter Questions

Problem 8QP

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While a television news reporter might state that “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent,” a more precise account of the Fed’s action would be as follows: “Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent.” “Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount.” “Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent.” “Today the Fed took a step toward contracting aggregate demand, and this was done by lowering the federal funds rate to 5.25 percent.”
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