You are Chair of the Federal Reserve Board. In your meeting with the Federal Ope

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 purchase and sale of government securities. To increase the money supply we will sell government securities, which increases the amount of reserves in the banking system and fuels deposit expansion. OMOs are the selling and buying of government securities. The money supply increases when purchasing occurs and contracts when selling occurs. OMOs work by changing the amount of excess reserves available in the banking system. OMOs refer to an increase or decrease of the required reserve ratio. Increasing the ratio will fuel deposit expansion and an increase in the money supply. 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.

Explanation / Answer

Ans b) OMOs are the buying and selling of government securities. The money supply increases when purchasing occurs and contracts when selling occurs. OMOs work by changing the amount of excess reserves available in the banking system.

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