Question

Through open-market operations, the Federal Reserve can purchase or sell, on either a temporary or permanent basis, U.S. government and agency securities with the objective of affecting the volume of reserves and the level of the federal funds rate.

compare the purchase and sale of government securities with the purchase and sale of agency securities. Include the effect of each program (purchase or sale) on the volume of reserves in the banking system and the federal funds rate.

Answer 1

One of the elements of the monetary policy which are adopted by the Federal Reserve is Open market operation through which Federal Reserve buy or sell the securities in the market to control the money flow into the overall market which will lead to control in the demand and supply of money in the overall economy.

Federal Reserve can sell their securities when it feels that there is a need to control the inflation, and the money flow in the entire economy, when the Federal Reserve sales the security into the market, the bank will have to buy it and when the bank will buy it, they will be left with lesser amount of Reserve to lend to the borrowers and hence there would be lesser amount to borrow and lend there would be control on the money flow in the economy.

Federal Reserve also buy the securities from the market when it feels that there is a need to increase the flow of the money in the economy, and stimulate the overall demand in the economy. Federal Reserve often buy the securities from the market so that the banks will be left with more money, when the Federal Reserve exchange money with the banks in place of various types of notes and it will inflate the Reserve of commercial banks, which will help them to lend more and as there will be more amount to lend and borrow. it can help to stimulate the demand in the economy.

Federal Reserve can also purchase and sale the agent debt securities into the market.these securities can include direct obligation of Freddy mae and fannie mae and the federal home loan banks. Purchasing of these debt securities will increase the quantity of Reserve balance in the banking system and selling of these debt securities will reduce the amount of Reserve balance in the banking system.

So while using these instrument of monetary policy through open market operations Federal Reserve keep the economy in check.