Assume the Fed is fighting a recession and thus elects to engage in expansionary
ID: 1119013 • Letter: A
Question
Assume the Fed is fighting a recession and thus elects to engage in expansionary monetary policy via an open market operation (OMO).This OMO would mean that it:
would sell U.S. government securities in the open market, bidding up their prices. This in turn would decrease reserves in the banking system and thus increase the fed funds rate of interest.
would buy U.S. government securities in the open market, bidding up their prices. This in turn would increase reserves in the banking system and thus decrease the fed funds rate of interest.
would buy U.S. government securities in the open market, bidding up their prices. This in turn would decrease reserves in the banking system and thus decrease the fed funds rate of interest.
would sell U.S. government securities in the open market, bidding their prices down. This in turn would decrease reserves in the banking system and thus increase the fed funds rate of interest.
a.would sell U.S. government securities in the open market, bidding up their prices. This in turn would decrease reserves in the banking system and thus increase the fed funds rate of interest.
b.would buy U.S. government securities in the open market, bidding up their prices. This in turn would increase reserves in the banking system and thus decrease the fed funds rate of interest.
c.would buy U.S. government securities in the open market, bidding up their prices. This in turn would decrease reserves in the banking system and thus decrease the fed funds rate of interest.
d.would sell U.S. government securities in the open market, bidding their prices down. This in turn would decrease reserves in the banking system and thus increase the fed funds rate of interest.
Explanation / Answer
C., In expansionary monetary policy OMO means that fed will buy bonds from public increasing money supply in economy decreasing the reserves in banking system and thus decrease the fed funds rate of intrest.