You are Chair of the Federal Reserve Board. In your meeting with the Federal Ope
ID: 1097039 • 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 alter reserve requirement up or down. The money supply will increase when we use OMOs to decrease the reserve requirement. OMOs are the selling and buying of government securities. The money supply increases Q when selling occurs and contracts when buying occurs. OMOs work by changing the amount of excess reserves available in the banking system. Open market operations refer to manipulating the rate at which the FED loans to member banks. Increasing the money supply occurs when the FED increases this rate, which decreases the amount of required reserves in the banking system. OMOs are the purchase and sale of government securities. To increase the money supply we will buy government securities which increases the amount of reserves in the banking system and fuels deposit expansion.Explanation / Answer
Correct option is (4).
To increase (decrease) money supply using expansionary (contractionary) monetary policy, the central banks buys (sells) government securities in open market, to increase (decrease) reserves, thereby fueling (dampening) deposit expansion.
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