5. Open market transactions involve which of the following activities? I. issuin

Question

5. Open market transactions involve which of the following activities?

I. issuing new Federal Reserve notes

II. buying or selling newly issued government bonds to raise funds for the government

III. buying or selling previously issued government bonds to change the volume of bank reserves

a. II only

b. II and III only

c. I only

d. III only

6. If the Fed buys U.S. government bonds from the public, it

a. decreases the volume of reserves in the banking system and the money supply tends to fall.

b. increases the volume of reserves in the banking system and the money supply tends to grow.

c. increases the volume of reserves in the banking system and the money supply tends to fall.

7. The Fed can increase the federal funds rate by

a. buying government securities which decreases bank reserves.

b. selling government securities which decreases bank reserves.

c. buying government securities which increases bank reserves.

Explanation / Answer

Ans)

5.
b. II and III only
Open market operations involve buying and selling of government bonds in the market.

6.
b. increases the volume of reserves in the banking system and the money supply tends to grow.
Buying from the public would mean an expansionary monetary policy.

7.
b. selling government securities which decreases bank reserves.
Selling treasury bills decreases the bank reserves and hence increases the federal funds rate.

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