Question

1. An open market operation is​ ____________.

A.

an exchange between a private bank and the Federal Reserve where the Fed buys or sells government bonds to private banks.

B.

an exchange between private banks where the banks buy or sell bonds to each other.

C.

the process of selling​ Fed-issued IOUs between banks.

D.

where a bank borrows reserves or bonds from the Federal​ Reserve's discount window.

2. The Federal Reserve conducts open market operations when it wants to​ ____________.

A.

change the liquidity levels of banks.

B.

influence the discount rate.

C.

influence the federal funds rate.

D.

change the level of reserves it holds for banks.

3. When the Fed buys government bonds from private​ banks, it (decreases/maintains/increases) the electronic reserves that banks hold.

Answer 1

1. Ans:- An open market operation is --

A. An exchange between the private bank and the federal reserve where the Fed buys or sells government bonds to private banks.

The Federal reserve which is the central bank of USA tries to controll the monetary circulation in the economy of country by buying or selling government bonds in the form of treasury bills, bonds or mortgaged backed securities from private banks which determines the interest rates depending on the market situation in order to controll inflation and deflation.

2. Ans:- The Federal reserve conducts open market operation when it wants to --

A. Change the liquidity levels of banks

Federal reserve buys or sells government bonds to private banks when it wants to increase or decrease the reserve of these banks in order to controll inflation and deflation.

3. Ans:- When the Fed buys government bonds from private banks, it increase the electronic reserves that banks hold.

Banks can offer more loans to indivituals and businesses with lower interest rates when federal reserves purchases government bonds from private banks which enhances investment in the economy and more employment.