ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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a change in the required reserve ratio
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the Fed buy/sells bonds to increase/decrease reserves available to banks
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the Fed changes the Discount Rate
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the Fed pays interest on bank deposits held at the Fed
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Detailed explanation-1: -Open market operations refer to the selling and purchasing of the treasury bills and government securities by the central bank of any country in order to regulate money supply in the economy. It is one of the most important ways of monetary control that is exercised by the central banks.
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: -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-4: -The Fed uses open market operations to buy or sell securities to banks. When the Fed buys securities, they give banks more money to hold as reserves on their balance sheet. When the Fed sells securities, they take money from banks and reduce the money supply.
Detailed explanation-5: -By buying or selling bonds, bills, and other financial instruments in the open market, a central bank can expand or contract the amount of reserves in the banking system and can ultimately influence the country’s money supply.