Question

In: Economics

What are open market operations? Explain. How can the Federal Reserve use its open market operations...

What are open market operations? Explain. How can the Federal Reserve use its open market operations to expand or contract the nation’s money and credit supply? Describe the chain of command at the Federal Reserve that oversees its open market operations. Give a detailed account of how monetary policy works to impact interest rates, aggregate demand, and the macroeconomy.

Solutions

Expert Solution

Open Market Operations - When central banks affect the supply of money in market by decreasing money or printing more money is called open market operations

When Federal Reserve wants to expand the money supply in the market they use expansionary monetary polices under this they will buy government bonds and government securities from the open market and pay for these bonds by printing more which lead to increase in the money supply in the market . Where as when Federal Reserve wants  to contract the money supply in the market they will sell bonds and securities and take out money fro that which lead to decrease in the supply in the market.

Effect of expansionary policy on demand, Interest rates and macro economics - As federal reserve use expansionary monetary policy as the there is increase in the money supply the commercial bank will have more money to lend due to this they decrease the lending rates which encourage private spending goes up because availability of easy lending which increases the demand and generate employment too as demand goes higher inflation starts to rise.

Effect of contract policy an demand , interest rate and macro economics- As federal reserve use contraction of money supply as there is a decrease in the money supply the commercial bank will have less money to lend due to this lending rate increases which make lending difficult and discourage private spending which lead to decrease in investment and which affect demand negatively as demand decreases public spending goes down too and inflation decreases too.


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