You are Chair of the Federal Reserve Board. In your meeting with the Federal Open Market Committee, the committee unanimously votes to increase the money supply using open market operations (OMOs). During the press conference after the meeting a reporter asks you to explain what OMOs are and how you will use them to increase the money supply. You reply:
A. OMOs alter reserve requirement up or down. The money supply will increase when we use OMOs to decrease the reserve requirement.
B. Open market operations refer to manipulating the rate at which the FED loans to member banks. Increasing the money supply occurs when the FED lowers this rate, which increases the amount of excess reserves in the banking system.
C. OMOs are the selling and buying of government securities. The money supply increases when selling occurs and contracts when buying occurs. OMOs work by changing the amount of excess reserves available in the banking system.
D. OMOs are the selling and buying of government securities. The money supply increases when purchasing occurs and contracts when selling occurs. OMOs work by changing the amount of excess reserves available in the banking system.
You are Chair of the Federal Reserve Board. In your meeting with the Federal Open Market Committee, the committee unanimously votes to increase the money supply using open market operations (OMOs). During the press conference after the meeting a reporter asks you to explain what OMOs are and how you will use them to increase the money supply. You reply:
A. OMOs alter reserve requirement up or down. The money supply will increase when we use OMOs to decrease the reserve requirement.
B. Open market operations refer to manipulating the rate at which the FED loans to member banks. Increasing the money supply occurs when the FED lowers this rate, which increases the amount of excess reserves in the banking system.
C. OMOs are the selling and buying of government securities. The money supply increases when selling occurs and contracts when buying occurs. OMOs work by changing the amount of excess reserves available in the banking system.
D. OMOs are the selling and buying of government securities. The money supply increases when purchasing occurs and contracts when selling occurs. OMOs work by changing the amount of excess reserves available in the banking system.
Related textbook solutions
Related questions
Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.
| Reserve Requirement | Simple Money Multiplier | Money Supply |
|---|---|---|
| (Percent) | (Dollars) | |
| 20 | ||
| 10 |
A higher reserve requirement is associated with a money supply.
Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds.
Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to to . Under these conditions, the Fed would need to worth of U.S. government bonds in order to increase the money supply by $200.
Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.
- The Fed cannot control the amount of money that households choose to hold as currency.
- The Fed cannot prevent banks from lending out required reserves.
- The Fed cannot control whether and to what extent banks hold excess reserves.
