Assume the Fed funds rate is initially on target.

The demand for reserves by commercial banks increases by $million 2. Households receive allowances from the government account held at the Federal Reserve for $million 7.

Which of the following statements is correct?

If the Federal Reserve wants to keep the Fed funds rate on target, it must ________ through its the open market operations $million _____ .

	A.	inject Fed funds; 9
	B.	withdraw Fed funds; 5
	C.	inject Fed funds; 7
	D.	inject Fed funds; 5
	E.	inject Fed funds; 2

Which of the following statement is correct?

In the liquidity premium theory of interest rates, an increasing yield curve necessarily implies that the market ________________________.

	A.	expects that the short-term interest rates will decrease.
	B.	expects that the short-term interest rates will remain the same.
	C.	expects that the short-term interest rates will increase.
	D.	is indecisive about the future change in short-term interest rates.
	E.	None of the above statements is correct,