ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The Fed sells government securities.
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The Fed lowers the prime interest rate.
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The Fed raises the reserve requirement
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The Fed purchases member bank reserves
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Detailed explanation-1: -Open market operations are used by the Federal Reserve to move the federal funds rate and influence other interest rates. It does this to stimulate or slow down the economy. The Fed can increase the money supply and lower the fed funds rate by purchasing, usually, Treasury securities.
Detailed explanation-2: -Open market operations (OMOs)–the purchase and sale of securities in the open market by a central bank–are a key tool used by the Federal Reserve in the implementation of monetary policy. The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC).
Detailed explanation-3: -When the Fed buys securities on the open market, cash is transferred to these banks, increasing the nation’s money supply. Conversely, when the Fed sells government securities, these banks have less cash available to them – a decrease in the nation’s money supply.
Detailed explanation-4: -The Federal Reserve buys and sells the government intending to control the supply of money and the rate of interest. This activity is known as Open Market Operation.