33.1 OPEN MARKET OPERATIONS

33.1 OPEN MARKET OPERATIONS - SECTION 33: OPEN MARKET...

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SECTION 33: OPEN MARKET OPERATIONS
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TOOLS OF THE FED: TOOL 3: OPEN MARKET OPERATIONS The purchase or sale of Treasury securities by the Fed in the open market This tool is used to increase or decrease the amount of reserves in the system. This influences the overall money supply and the level of interest rates. Policy decisions concerning open market operations are made by the Federal Open Market Committee. (FOMC)
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TOOLS OF THE FED: OPEN MARKET OPERATIONS The purchase or sale of Treasury securities by the Fed in the open market A Fed PURCHASE of securities increases the money supply. A Fed SALE of securities decreases the money supply. Changing the amount of reserves in the system has a multiplier effect on the overall money supply and influences the level of interest rates. The FEDERAL OPEN MARKET COMMITTEE, (FOMC), determines open market operations.
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EXPANSIONARY MONETARY POLICY: AN OPEN MARKET PURCHASE The Fed buys government securities from commercial banks and the general public in the “open market”. The Fed gives a check to the bank. The bank’s reserves increase. The money supply increases. (The Fed has CREATED money!) The check is deposited in a bank, bank reserves increase, and the multiplier process begins. The Fed now owns the government bonds, and the public has more money. The money supply has increased.
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By law, the Treasury cannot borrow directly from the Fed. Thus, the Fed is not permitted to buy bonds from the Treasury.
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33.1 OPEN MARKET OPERATIONS - SECTION 33: OPEN MARKET...

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