Describe how the Fed uses open market operations to change short-term and long-term interest rates
What will be an ideal response?
The Fed tries to achieve a target level for the federal funds rate by using open market operations. If it wants to lower the federal funds rate, it will buy Treasury bills using open market operations. This purchase will inject the banking system with reserves. The increased supply of reserves will lower the overnight loan rate on these reserves, which is called the federal funds rate. Changes in the federal funds rate will usually result in changes in the interest rates on other short-term financial assets such as Treasury bills, and eventually affect longer-term rates such as the rate of corporate bonds and mortgages. However, the effect on these longer-term rates is usually smaller than the impact on short-term rates and occurs with a lag.
You might also like to view...
For a household in a (c,c') graph, the optimal consumption bundle is
A) to the left of the endowment point. B) to the right of the endowment point. C) on the endowment point. D) dependent on other factors.
If the Federal Open Market Committee decides to increase the money supply, then the Federal Reserve
a. creates dollars and uses them to purchase government bonds from the public. b. sells government bonds from its portfolio to the public. c. creates dollars and uses them to purchase various types of stocks and bonds from the public. d. sells various types of stocks and bonds from its portfolio to the public.