Question

In: Economics

When the Fed sells assets in the open market to individuals and investors: the statement above...

When the Fed sells assets in the open market to individuals and investors:

the statement above is the " question "

Individuals and investors swap a deposit balance for the assets that the Fed is selling.

The amount of central bank reserves on individual's balance sheets increases

Individual's stockholder's equity is reduced.

Individuals and investors swap a real asset balance for the assets that the Fed is buying.

Solutions

Expert Solution

When the Fed sells assets in the open market to individuals and investors

OMO = OPEN MARKET OPERATION

If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds. Therefore, OMO has a direct effect on money supply. OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase.

So, OMO has the same effect of lowering rates/increasing money supply or raising rates/decreasing money supply as direct manipulation of interest rates. The real difference, however, is that OMO is more of a fine-tuning tool because the size of the U.S. Treasury bond market is utterly vast and OMO can apply to bonds of all maturities to affect money supply.


Related Solutions

If the Fed sells government securities to the general public in the open market, the A)...
If the Fed sells government securities to the general public in the open market, the A) public gives the securities to the Fed in exchange for a Fed check, which when deposited at commercial banks will decrease their reserves at the Fed. B) Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will increase commercial bank reserves at the Fed. C) public gives the securities to the Fed in exchange...
Suppose the Fed buys government bonds. (a) Does the open market operation described above increase the...
Suppose the Fed buys government bonds. (a) Does the open market operation described above increase the price level? Defend your answer. (b) Does the open market operation described above redistribute resources between creditors and debtors? Defend your answer.
in a open market operations the fed buys 15 million of government bonds from individuals what...
in a open market operations the fed buys 15 million of government bonds from individuals what is the results
When the Fed makes an open market sale of government securities, or sale of treasuries (TBs,...
When the Fed makes an open market sale of government securities, or sale of treasuries (TBs, TNs,…), M2 shall: Group of answer choices a. Decrease b. Remain unchanged c. None of the above d. Increase e. All of the above
When the Fed wants to contract the money supply through open market operations, what would it...
When the Fed wants to contract the money supply through open market operations, what would it do with the government bonds and what would happen to the reserves the Fed or the member banks hold?
If the Fed conducts open-market purchases, the money supply
If the Fed conducts open-market purchases, the money supply  increases and aggregate demand shifts right.  increases and aggregate demand shifts left.  decreases and aggregate demand shifts right. decreases and aggregate demand shifts left.
When the Fed increases the money supply through open market operations, it can take some time...
When the Fed increases the money supply through open market operations, it can take some time before the interest rate changes and new investment happens. • Is this an example of inside or outside lag? • Why does doesn’t the monetary expansion change GDP instantly? Provide an example relating to either the bank, the borrower, or another party in the economy.
Open market operations are the Fed’s traditional method of managing the fed funds rate. But open...
Open market operations are the Fed’s traditional method of managing the fed funds rate. But open market operations will not work well today. Why?
Describe the Board of Governors of the Fed and the Open Market Committee (FOMC).
Describe the Board of Governors of the Fed and the Open Market Committee (FOMC).
What are the economic risks of aggressive fed open market purchases
What are the economic risks of aggressive fed open market purchases
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT