Describe how open market operations change the quantity of money. Explain how the Fed's response to...

Describe how open market operations change the quantity of money.

Explain how the Fed's response to inflation works its way through the economy to ultimately affecting real GDP and the price level.

Solutions

Expert Solution

In the open market operations, the Fed sells or buys the government bonds in the market to the banks which either increases or decrease the supply of money in the economy.When the Fed wants to increase the money supply, it will buy the bonds and make more funds available to the banks and when it wants to decrease the money supply, it will sell bonds which will decrease the funds available with the banks.

When there is an inflation, the Fed will adopt a contractionary monetary policy and it will sell bonds in the market which will decrease the funds available with the banks,as a result, the aggregate demand in the economy decreases which will reduce the real GDP and the price level.

Rahul Sunny answered 1 year ago

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