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Does an open market operation in which the Fed buys securities from the general public de

 Does an open market operation in which the Fed buys securities from the general public decrease or increase the banking system's reserves?

Answer:  An open market purchase of government securities by the Fed increases the banking system's reserves.

Topic:  Open market operation

Skill:  Level 2: Using definitions

Section:  Checkpoint 11.4

Status:  DMC

 

8) The Fed conducts an open market operation and buys $50,000 of government securities from Commerce Bank. The desired reserve ratio is 25 percent. What is the change in Commerce Bank's total reserves and its excess reserves?

Answer:  When the Fed buys $50,000 of government securities from Commerce Bank, Commerce Bank's total reserves increase by $50,000. None of these reserves are desired reserves, so Commerce Bank's excess reserves also increase by $50,000.

Topic:  Open market operation

Skill:  Level 3: Using models

Section:  Checkpoint 11.4

Status:  AA

 

9) If the Fed sells $100 million of U.S. government securities, what happens to the quantity of money?

Answer:  If the Fed sells $100 million of U.S. government securities, the monetary base decreases and, along with it, the quantity of money decreases. The money multiplier shows that the quantity of money decreases by more than $100 million.

Topic:  Open market operation

Skill:  Level 2: Using definitions

Section:  Checkpoint 11.4

Status:  CT

 

10) When the Fed buys a government security, what happens to the monetary base and the quantity of money? Which changes by more or do both change by the same amount?

Answer:  When the Fed buys a government security, both the monetary base and the quantity of money increase. As reflected by the money multiplier, the increase in the quantity of money exceeds the increase in the monetary base.

Topic:  Open market operation

Skill:  Level 2: Using definitions

Section:  Checkpoint 11.4

Status:  MR

11) "When the Fed makes an open market purchase of government securities, the quantity of money will eventually decrease by a fraction of the initial change in the monetary base." Is the previous statement correct or incorrect? Explain your answer.

Answer:  The statement is wrong on two counts. First, if the Fed makes an open market purchase of government securities, the quantity of money will increase rather than decrease. Second, the money multiplier points out that the change in the quantity of money will be greater than, not less than, the initial change in the monetary base.

Topic:  Open market operation

Skill:  Level 2: Using definitions

Dec 08 2019 View more View Less

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