This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Open market operations are the sale and purchase of government bonds issued and regulated by the Fed. When the Fed sells government bonds, the public exchanges currency for bonds, resulting in a shrinking of the money supply. When the Fed purchases government bonds, the Fed exchanges currency for bonds, thus resulting in an increase in the money supply. Open market operations are the most common tool that the Fed uses to affect the money supply. In fact, almost every weekday government bonds are bought and sold in New York City. The second way that the Fed can influence the money supply is through changing the reserve requirements. We learned on the purpose of banks that the money multiplier shows how much an initial deposit increases the money supply after loans are made and redeposited. Recall that the money multiplier is one over the reserve requirement. and redeposited....
View Full Document
- Fall '10
- Monetary Policy, Fed, Contractionary monetary policy, reserve requirement, federal funds