QUESTION 11 Defensive open market operations are used to _____. balance changes

Question

QUESTION 11

Defensive open market operations are used to _____.

balance changes in other factors that impact reserves

change the amount of reserves

raise interest rates

lower interest rates

1 points   

QUESTION 12

Because timely information on the price level and economic growth is frequently unavailable, the Fed has adopted a strategy of _____

targeting the exchange rate, since the Fed has the ability to control this variable.

targeting the price of gold, since it is closely related to economic activity.

using an intermediate target such as a monetary aggregate.

stabilizing the CPI, since the Fed has a high degree of control over the CPI.

1 points   

QUESTION 13

The primary motivation behind the creation of the Federal Reserve System was the desire to _____

lessen the occurrence of bank panics.

stabilize short-term interest rates.

eliminate state regulated banks.

finance World War I.

balance changes in other factors that impact reserves

change the amount of reserves

raise interest rates

lower interest rates

Explanation / Answer

1. Defensive Open Market Operations

Defensive open market operations are used to balance changes in other factors that impact reserves.

Defensive open market operations can be defined as strategies used in open market operations in order to offset other anticipated market conditions that would probably affect the level of funds in the economy. For example, if a foreign country is expected to sell its US treasury securities holdings in exchange for US dollars, the Federal Reserve may decide to buy treasury securities in advance in order to maintain the same level of US dollars.

2. Fed Strategy

Because timely information on the price level and economic growth is frequently unavailable, the Fed has adopted a strategy of using an intermediate target such as a monetary aggregate.

The term intermediate target is used to distinguish the federal reserve's monetary targets from ultimate goal variables such as growth of real output, the rate of inflation, unemployment rate and operating variables such as bank reserves and the federal funds rate. The federal reserve can maintain a high degree of control over operating variables, however there is only a loose relationship between these operating variables and goal variables. Hence the policymakers can find it useful to rely on intermediate target variables that are more closely related to economic goals than are operating targets.

3. Origin of fed reserve system

The primary motivation behind the creation of the Federal Reserve System was the desire to lessen the occurrence of bank panics.

Before the founding of the Federal Reserve System, the United States underwent several financial crises. A particularly severe crisis in 1907 led Congress to enact the Federal Reserve Act in 1913. Today the Federal Reserve System has responsibilities in addition to ensuring the stability of the financial system such as to manage the nation's money supply through monetary policy to achieve the sometimes-conflicting goals of maximum employment and stable prices, including prevention of either inflation or deflation.

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