Question

In: Economics

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?

Solutions

Expert Solution

The central bank is expected to aggressively deploy open market operations (OMO) to release money into the market.

Open market operations are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions. The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system. These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend. The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.

The cental bank’s signal that it will move to a ‘neutral’ liquidity stance from a ‘deficit’ stance, hints at more liquidity in the system in future. This could arm banks with more funds for lending, and lead to softer interest rates in the economy. This is good news for both businesses as well as individuals.

More money in the markets is welcome. But it is important that open market operations are in sync with the stated monetary policy.

Rahul Sunny answered 2 years ago
Next > < Previous

Related Solutions

16) If the Fed makes an open market ________ of government securities, the federal funds rate...
16) If the Fed makes an open market ________ of government securities, the federal funds rate will ________ as the quantity of money ________. A) purchase; rise; increases B) sale; fall; increases C) purchase; fall; decreases D) sale; rise; decreases 17) If the Fed makes an open market ________ of government securities, the federal funds rate ________ and the immediate impact is to shift the aggregate ________ curve. A) purchase; falls; demand B) sale; falls; demand C) sale; rises; supply...
16) If the Fed makes an open market ________ of government securities, the federal funds rate...
16) If the Fed makes an open market ________ of government securities, the federal funds rate will ________ as the quantity of money ________. A) purchase; rise; increases B) sale; fall; increases C) purchase; fall; decreases D) sale; rise; decreases 17) If the Fed makes an open market ________ of government securities, the federal funds rate ________ and the immediate impact is to shift the aggregate ________ curve. A) purchase; falls; demand B) sale; falls; demand C) sale; rises; supply...
Is the Fed’s goal to reach zero inflation? Explain How do changes in the fed funds...
Is the Fed’s goal to reach zero inflation? Explain How do changes in the fed funds rate affect the economy? How long before changes in the fed funds rate affect the economy? How much does the Fed change the fed funds rate normally? Does the Fed Chair set monetary policy? Why isn’t the money supply in the game? What is the discount rate? Why is the discount rate not included in the game? Does this game match how monetary policy...
Typically, the Fed targets the fed funds rate. Assume that the Fed is operating the usual...
Typically, the Fed targets the fed funds rate. Assume that the Fed is operating the usual way, targeting a specific fed funds value (such as its present target), when the rate of economic growth begins to slow. Outline: (i) the actions the Fed would have to take to sustain its current interest rate target; (ii) the likely impact those actions will have on the rate of economic growth; and (iii) how the yield curve can be expected to change as...
Typically, the Fed targets the fed funds rate. Assume that the Fed is operating the usual...
Typically, the Fed targets the fed funds rate. Assume that the Fed is operating the usual way, targeting a specific fed funds value (such as its present target), when the rate of economic growth begins to slow. Outline: (i) the actions the Fed would have to take to sustain its current interest rate target (ii) the likely impact those actions will have on the rate of economic growth (iii) how the yield curve can be expected to change as a...
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?
3) Between February 2008 and Summer 2009, the Fed supplemented its open market operations with a...
3) Between February 2008 and Summer 2009, the Fed supplemented its open market operations with a greatly expanded program of direct lending (both overnight and short term 28 and 84 day loans) to commercial banks, investment banks, brokerage and primary dealer units of bank holding companies. It also agreed to accept a wider range of short-term securities (instead of accepting only T-Bills) as collateral on these loans and even initiated a program to buy commercial paper from money market funds....
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
12. Explain how the Fed uses open market operations to provide monetary stimulus to the macro...
12. Explain how the Fed uses open market operations to provide monetary stimulus to the macro economy. Explain how the Fed expects this monetary stimulus to affect aggregate demand (AD)? What are some of the reasons that such monetary stimulus might prove futile?
6.Monetary Policy a.How can open market operations be used by the Fed to increase or decrease...
6.Monetary Policy a.How can open market operations be used by the Fed to increase or decrease reserves in the banking system? b.What happens to bank lending and to interest rates when the Fed increases reserves in the banking system? c.Using your answer to part b, explain why Federal Reserve’s efforts to increase the money supply would be termed expansionary. d.Why would the Fed’s efforts to decrease the money supply be considered contractionary?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT