Back to Assignment Attempts 76 Average 7617 2 Open market op

Back to Assignment Attempts: 7.6 Average: 7.6/17 2. Open market operations versus discount loans Consider an expansionary open market operation. Suppose the Federal Reserve buys government secunities from commercial banks. Suppose that the sellers of government securities redeem these checks drawn on the New York Fed for aurrency. Then, ceteris partbus, bank reserves currency in circulation ? , and thus the monetary base will Suppose now that the Federal Reserve wants to increase the monetary base by increasing bank reserves only. Which of the following actions enables the Fed to achieve its goal? O Lend to commercial banks through the term auction fadility O Buy the government securities exdusively from the non-banking public O Require the non-banking public to repay discount loans O Sell the government securities exdusively to commercial banks The Federal Reserve\'s control over the amount of government secunities it buys or sells is window lending. This is because the Fed has complete control over than its control over discount Grade it Now Save & Continue Continue without saving

Solution

Suppose that the sellers of government securities redeem these checks drawn on the New York FED for currency. the ceteris paribus, bank reserves decreases, currency in circulation increases, and thus the monetary base will increase.

Noe FED wants to increase the monetary base by increasing bank reserves only. Bank reserve will be increased by selling government securities exclusively to commercial banks. So the last option is correct.

The Federal Reserve\'s control over the number of government securities it buys or sells is more than its control over discount window lending. This is because the FED has complete control over the open market operation.