Exercise

Answer the following questions.

1. How do open market operations work?

A. The Fed buys and sells U.S. Treasuries and federal agency securities in the secondary market to speed up or slow down the economy.

B. The Fed raises and lowers margin requirements to slow or speed up speculative activity in the credit markets.

C. The Fed may lower the discount rate to make the discount window a more attractive source of borrowing.

D. The Fed raises or lowers its reserve requirements, allowing banks less or more lending ability.

2. What happens in open market operations?

I. To stimulate the economy, the Fed purchases government securities on the secondary market, which releases more money into the economy, raising interest rates.

II. To slow the economy, the Fed will sell Treasury securities, which removes money from the economy, increasing the cost of credit.

III. The Fed sells Treasury bonds to select banks, reducing the banks’ excess reserves, reducing the supply of federal funds and causing a decrease in the federal funds rate.

IV. When the Fed sells Treasury bonds, the Fed has a federal funds target rate in mind. An increase in the federal funds rate means higher borrowing costs for banks, causing them to raise their lending costs to the broader economy.

A. I and IV

B. I and III

C. II and