How do open market operations work?
What will be an ideal response?
If the FOMC decides to increase the money supply, it will direct the trading desk at the Federal Reserve Bank of New York to buy U.S. Treasury Securities from the public. When the sellers of these securities deposit the funds from the sale into their banks, the reserves of the banking system will rise. This will start the process of expanding the money supply as the increase in reserves expands loans and checking account deposits. If the FOMC wants to reduce the money supply, it will direct the trading desk to sell U.S. Treasury securities. This will decrease reserves, contract loans, contract checking accounts and shrink the money supply.
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In the first half of 2008, food and energy costs in the United States increased. At the same time, the financial crisis slowed production. As a result, economists warned that the economy would
A) suffer an inflationary gap. B) see a decrease in aggregate demand and an increase in long-run aggregate supply. C) experience stagflation. D) see an increase in potential GDP.
Selling tickets to graduation ceremonies has long been a tradition among students at institutions that limit the number of guests. Suppose your classmate, Heidi, purchased two tickets for $40 each. Is this transaction economically efficient?
A) Yes, it is efficient only from the perspective of the seller and not from the perspective of the buyer. B) Yes, it was a voluntary exchange that benefited both parties. C) No, people should never be allowed to sell items they received for free. D) No, Heidi paid too much for the tickets.