Explain the effect of Federal Reserve selling-off 20m Treasury securities to the balance sheets of Fed...

Explain the effect of Federal Reserve selling-off 20m Treasury securities to the balance

sheets of Fed and the banking system.

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Expert Solution

Answer: Treasury securities- These are the Government bonds that are issued by U.S Government to the public. Treasury securities when issued for shorter period, are called treasury bills and for longer period (2 to 10 years), are called Treasury notes. Risk in treasury securities is lower and Yield (return) is also lower as compare to other bonds.

Open market operations- This is a part of monetary policy in which U.S Government purchases and sells treasury securities in the Open market to maintain and syabilize the supply of money in the economy. Fed purchases securities when it wishes to increase the liquidity in the system by increasing the flow of money and it sells the treasury securities when it wants to decrease the flow of money.

Effect of Federal Reserve selling-off 20 m Treasury securities to the balance sheets of Fed and the banking system- FED is selling 20 million treasury securities to reduce the flow of money in the economic system, this will control the liquidity in the system and Fed will get more cash with it in the balance sheet because when it sells securities, public buys the securities and give money to Fed so Fed's cash will increase so its assets will increase in the balance sheet.

On the other hand, selling securities will decrease the amount of money in the banking system and federal rates may increase. This will control the liquidity in the banking system.

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