Question

1. Explain how open-market operations work.

2. Explain the difference between the discount rate and the federal funds rate.

3. Explain how lowering the reserve ratio affects the economy.

4. Explain each of the following in terms of whether they were discretionary fiscal policy, non-discretionary fiscal policy, or monetary policy: TARP, the AIG bailout, the 2009 stimulus package and the rapid increase in unemployment compensation spending.

5. Explain how Fed policy can favor financial interests or the interests of workers.

6. Why might an agreement like NAFTA increase GDP but not be favored by union members?

Answer 1

1. Open market operations can be carried by the Fed in which they purchase government securities from the market and this boosts the economy.The fed can buy securities from the the banks through open market operations to reduce liquidity in the system and this raises the interest rate in the economy as supply of funds reduces in the system. The OMO is a tool to reduce liquidity and supply of funds and hence raising the interest rates.


2. Discount rate is the rate which federal reserve charges banks for overnight loans. The discount rate is lower than feds funds rate. The fed can directly control discount rate and can be used to control money flow to the economy whereas

Fed Funds rate is the rate at which banks loans to other banks or other depository institutions for overnight loans.This rate is higher than discount rate.