Exercise
Answer the Following Questions
- 1. How do open market operations work?
- A. The Fed buys and sells U.S. Treasuries and federal agency securities in the secondary market to speed up or slow down the economy.
- B. The Fed raises and lowers margin requirements to slow or speed up speculative activity in the credit markets.
- C. The Fed may lower the discount rate to make the discount window a more attractive source of borrowing.
- D. The Fed raises or lowers its reserve requirements, allowing banks less or more lending ability.
- 2. What happens in open market operations?
- I. To stimulate the economy, the Fed purchases government securities on the secondary market, which releases more money into the economy, raising interest rates.
- II. To slow the economy, the Fed will sell Treasury securities, which removes money from the economy, increasing the cost of credit.
- III. The Fed sells Treasury bonds to select banks, reducing the banks’ excess reserves, reducing the supply of federal funds, and causing a decrease in the federal funds rate.
- IV. When the Fed sells Treasury bonds, the Fed has a federal funds “target rate” in mind. An increase in the federal funds rate means higher borrowing costs for banks, causing them to raise their lending costs to the broader economy.
- A. I and IV
- B. I and III
- C. II and IV
- D.&#
