How can the Federal Reserve raise interest rates? use open market operations to reduce the money supply. increase the opportunity cost of holding money by raising the rate of inflation. raise fees for automatic teller machines (ATMs). use open market operations to increase the money supply. increase the velocity of money

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Melissa Yoder

29 April, 02:50

How can the Federal Reserve raise interest rates? use open market operations to reduce the money supply. increase the opportunity cost of holding money by raising the rate of inflation. raise fees for automatic teller machines (ATMs). use open market operations to increase the money supply. increase the velocity of money

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Bentley Horn · Answer 1

The correct answer is: "use open market operations to reduce the money supply"

The interest rate can be defined as the "price of money" as it determines the amount charged for borrowed money. Therefore, if the money supply should be decreased, as the relative scarcity of money will incrase its price, the interest rate.

The Federal Reserve can use open market operations to either increase or reduce the money supply, depending on its needs. These operations consist on selling/buying US debt, so that the amount earned/paid is removed from/put into circulation.

If US debt is sold through open market operations, the total amount paid by the buyer to the Fed will be kept by the Fed and taken out from circulation. As a result, the money supply will decrease and the interest rate levels will rise.