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.
