If the actual rate is above the target rate, what action should the Fed take?

• A. Buy Treasury Bills; Federal Reserve
• B. Sell Treasury Bills; President
• C. Increase the Discount Rate; Congress
• D. Sell Treasury Bills; Federal Reserve

Answer: (D)

When the rate is above the target, policy should tighten to cool the economy and bring the rate down toward the target. The Fed does this by selling Treasury bills in open-market operations. Selling bills reduces bank reserves, which lifts short-term interest rates and slows borrowing and spending, helping to push the rate back toward the target.

Buying Treasuries would inject liquidity and lower rates, moving away from the target. Increasing the discount rate is a tightening tool managed by the Fed, not Congress, but the option that pairs tightening with the Fed is selling Treasuries.