When a decrease in credit card availability increases the ca

When a decrease in credit card availability increases the cash people hold, the money-demand curve shifts to the right. As a result, there is an increase in the interest rates. What should the Federal Reserve do to restore the interest rate level back to the original interest rate? O Buy bonds to increase the interest rate Increase the discount rate Decrease the Fed funds ratee Sell 3-month T-bills

Solution

The Federal funds rate is the short-term interest rate at which bank can borrow money from other banks. The decrease in Federal fund rate means the expansionary monetary policy is taken by the Federal government. So increase in money supply decreases the interest rate. So the third option is correct.