2) Explain how the Fed carries out open market operations. How does this change the money supply? How is the Fed Funds rate an indicator of this action?
OPEN MARKET OPERATIONS BY THE FED
DISCOUNT RATE,RESERVE REQUIREMENTS AND OPEN MARKET OPERATIONS ARE THE THREE TOOLS USED BY THE FED TO IMPLEMENT AND CONTROL THE MONETARY POLICY.OPEN MARKET OPERATIONS ARE MOST FREQUENTLY USED AS THEY ARE FLEXIBLE AND EASY TO IMPLEMENT.
THE BUYING OR SELLING OF GOVERNMENT SECURITIES IN THE OPEN MARKET IN ORDER TO INCREASE OR DECREASE THE MONEY SUPPLY IN THE BANKING SYSTEM IS KNOWN AS OPEN MARKET OPERATIONS.THE FED OPEN MARKET COMMITTEE(FOMC) IS A COMMITTEE APPOINTED BY THE FED,SO AS TO ENACT ITS MONETARY POLICY.THE FOMC SETS A FEDERAL FUNDS RATE AND THEN IMPLEMENTS OPEN MARKET OPERATIONS OR THE OTHER TOOLS OF THE MONETARY POLICY TO MEET THE TARGET FUNDS RATE.THE FEDERAL FUNDS RATE IS THE INTEREST RATE BANKS CHARGE TO EACH OTHER FOR THE OVERNIGHT LOANS TO MEET THEIR RESERVE REQUIREMENTS.THE FED OBTAINS THE TARGET FUNDS RATE BY ENACTING AN EXPANSIONARY OR CONTRACTIONARY MONETARY POLICY
EXPANSIONARY MONETARY POLICY IS IMPLEMENTED WHEN THE FED WANTS TO REDUCE THE FEDERAL FUNDS RATE AND INCREASE SUPPLY OF MONEY.THE FED PURCHASES GOVERNMENT SECURITIES AND PAYS FOR THEM TO THE ACCOUNT MAINTAINED AT THE FED BY THE PRIMARY DEALERS BANK.THIS CASH DEPOSITED ADDS TO THE CASH THAT COMMERCIAL BANKS HOLD AND THUS INCREASE THEIR LENDING CAPACITY.WHEN AMOUNT OF FUNDS AVAILABLE TO LOAN INCREASES INTEREST RATES COME DOWN AND BORROWING BECOMES CHEAPER.
CONTRACTIONARY MONETARY POLICY IS IMPLEMENTED WHEN THE FED WANTS TO INCREASE THE FEDERAL FUNDS RATE AND REDUCE SUPPLY OF MONEY.THE FED SELLS GOVERNMENT SECURITIES WHICH DECREASES THE AMOUNT OF MONEY LEFT WITH THE BANK AND THUS REDUCES THEIR LENDING CAPACITY.THIS DECREASE IN THE AMOUNT OF FUNDS INCREASES THE INTEREST RATE AND BORROWING BECOMES COSTLY.
HOW IS THE FED FUNDS RATE AN INDICATOR OF THIS ACTION
AN INCREASE IN THE FED FUNDS RATE INDICATES REDUCED MONEY SUPPLY IN THE MARKET,WHICH LEADS TO HIGHER INTEREST RATE.IN THIS SITUATION MARKET EQUILIBRIUM LEVEL OF SUPPLY AND DEMAND FOR MONEY IS LOWERED.(CONTACTIONARY MONETARY POLICY)
A DECREASE IN FEDS FUNDS RATE INDICATES INCREASED MONEY SUPPLY IN THE MARKET,WHICH LEADS TO LOWER INTEREST RATE.IN THIS SITUATION MARKET EQUILIBRIUM LEVEL OF SUPPLY AND DEMAND FOR MONEY IS INCREASED.(EXPANSIONARY MONETARY POLICY)
THE FEDERAL FUNDS RATE RESPRESENTS THE INTEREST RATES CHARGED BY THE LENDING INSTITUTION.
2) Explain how the Fed carries out open market operations. How does this change the money...
Fed uses open market operations to influence the money supply. Explain both an open market purchase and an open market sale.
Explain how the Fed uses open market operations and discount lending to affect the fed funds rate and reserves in the banking system?
When the Fed increases the money supply through open market operations, it can take some time before the interest rate changes and new investment happens. • Is this an example of inside or outside lag? • Why does doesn't the monetary expansion change GDP instantly? Provide an example relating to either the bank, the borrower, or another party in the economy.
1) The Fed carries out its open market operations through Select one: A. the office of the Comptroller of the Currency and the largest U.S. money banks. B. the Desk of the NY District Bank and its network of authorized securities dealers. C. U.S. securities firms buying and selling stocks, bonds, and government securities. D. the New York Stock Exchange and affiliated stock brokers. 2) The Federal Reserve is a quasi-independent government agency directly under the authority of the Select...
The Fed buys bonds in the open market and pays for the bonds by transmitting funds to the bond dealer's deposit account in a bank, at which point it becomes part of the money supply. The Fed has just created money, because it has added to the reserve account of the bond dealer's bank, and the money supply increases by the amount of the purchase. Please add more to my response above. Be more specific. Question: 4) Explain how the...
Discussion Questions for Tuesday, Apr. 23 1. Suppose the Fed conducts $10 million open market purchase from Bank A. If Bank A and all the other banks use reserves to purchase only securities, what will happen to deposits in the banking system and how much does it expand? 2. Let's assume that in a hypothetical economy currency in circulation is $600 billion, the amount of checkable deposits is $900 billion, excess reserves are $15 billion and required reserve ratio is...
When the Federal Reserve conducts open market operations, it buys or sells government bonds. buys and sells foreign currency. manipulates of the rate at which it loans to member banks. increases or decreases the required reserve ratio. How will the Fed's policy action change the money supply? Use only the actions corresponding to your choice in the previous part. The money supply increases The money supply decreases Answer Bank Answer Bank The Fed sells foreign currency The Fed buys bonds...
The Fed does tight (contractionary) money policy via open market operations with a single bank. As a result, the bank's ER (dollar amount) will and its desired excess reserve ratio er will fall; fall O rise; rise o fall; remain unchanged O rise; remain unchanged
In which of the following cases does the quantity of money supply (MS) in the money market decrease? a.The Fed buys bonds in open-market operations. b.The Fed raises the reserve requirement. c.The Fed decreases the interest rate it pays on reserves(on required and excess reserves). d.The Federal Open Market Committee (FOMC) decreases its target for the federal funds rate and market interest rates. e.The Fed decreases the discount rate that it charges banks. f.None of the above.
11. (4 points) Assume that the currency-deposit ratio is 0.2. The Federal Reserve carries out open-market operations, purchasing $1 million worth of bonds from banks. This action increased the money supply by $2 million. Suppose this economy has $10 million of total reserves after the open market operations. (1) The money multiplier is (2) The reserve-deposit ratio is (3) The amount of currency after the open market operation is $_ (4) The amount of money supply after the open market...