You are Chair of the Federal Reserve Board. In your meeting with the Federal Ope
ID: 1096926 • Letter: Y
Question
You are Chair of the Federal Reserve Board. In your meeting with the Federal Open Market Committee, the committee unanimously votes to increase the money supply using open market operations (OMOs). During the press conference after the meeting a reporter asks you to explain what OMOs are and how you will use them to increase the money supply. You reply: OMOs are the selling and buying of government securities. The money supply increases ? when selling occurs and contracts when buying occurs. OMOs work by changing the amount of excess reserves available in the banking system. OMOs are the purchase and sale of government securities. To increase the money supply O we will buy government securities which increases the amount of reserves in the banking system and fuels deposit expansion. Open market operations refer to manipulating the rate at which the FED loans to member O banks. Increasing the money supply occurs when the FED increases this rate, which decreases the amount of required reserves in the banking system. OOMOs alter reserve requirement up or down. The money supply will increase when we use OMOs to decrease the reserve requirement.Explanation / Answer
I will reply the following:
Option A: OMO's are selling and purchase of govenment securities. The money supply increases when selling occurs and contraction occurs when purchase occurs. OMO's work by changing the amount of excess reserves available in the banking system.
OMO's stand for Open market operations in which the government securities are used to generate cash flow and they the inflow of cash are used to generate cash flow in the economy. The money generated by the selling of securites are used by the banks to adjust the supply of reserve balances so as to keep the federal funds rate around the target federal funds rate.
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