Question

The Federal Reserve Bank controls the money supply in order to affect interest rates and the economy. Although interest are market determined, the Fed has a strong influence on interest rates by controlling the supply of loanable funds. The Fed uses it open market operations affects interest rates. Discuss the Fed’s open market operations. please do not plagiarize

Answer 1

Open market operations refer to purchase and sale of government securities in the open market by the central bank. The Federal reserve can buy government securities from the banks and in return inject huge amounts of money into the economy. This is conducted when the Fed wants to implement an expansionary monetary policy.Buying government securities from banks adds credit to the bank’s reserves. This in turn gives them greater money to lend to the customers which pushes down the interest rates. Due to lower interest rates there is a huge increase in the demand of goods and services which encourages producers to produce more. There is an overall stimulation in the economy as a result.

Sale of government securities to the bank’s squeezes their credit. This reduces the amount of money that banks have to lend to their customers and has an upward impact on the interest rates. Due to higher interest rates there is a reduction in the demand for goods and services which slows down the economy. Selling government securities in the open market is a way of implementing a contractionary monetary policy.