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.

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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.

Rahul Sunny answered 1 month ago

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