Explain in your own words the steps the Federal Reserve goes through when conducting a contractionary...

Explain in your own words the steps the Federal Reserve goes through when conducting a contractionary open market operation. When and why might the Federal Reserve do this? 300 words

Expert Solution

When the federal reserve wants to go to open market operations with the contractionary type of goal, then the federal reserve will sell the treasuries in the open market which will help the federal reserve to procure the money available in the public system because public will borrow this treasury issued by the federal reserve and they give money in exchange. When there is a shortage of money in the system, the demand for money will increase which will further increase the interest rates. with the increased interest rates the buying habits of the public will be decreased. As a result of this, the demand for products will get decreased and inflation will be under control.

In this way, US treasury will successfully Pull off the money from the public system by conducting this open market operation. Treasury bills are used to conduct open market operations because they are considered as No risk investments by all the investors and they are backed by the federal reserve and government. Treasury bills have an open market and they can be traded in exchanges and they are used as riskless investments by many financial institutions and brokerage firms.

why is the contractionary open market operations will be conducted by the federal reserve?

the sole purpose of conducting contractionary open market operations by selling US treasury bills are are to increase the interest rates in the economy under control inflation rates.

When is the contraction open market operations conducted?

They are conducted when inflation rates in the country is increasing and speed has reached level where the need for controlling it has araised. It can also be conducted to achieve the targeted interest rates in the economy anda to make more funds available for the treasury.

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jeff jeffy answered 2 years ago

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