lectur4-page24 - Just the opposite occurs when the Fed...

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Open market operations by the Federal Reserve involve the buying and selling of treasury securities. A purchase by the Fed of treasury securities adds to the money supply. A sale of treasury securities reduces the money supply. When the Fed buys securities from any seller, it pays by issuing a check on itself. When the seller of the security deposits the Federal Reserve check in his/her bank account, the bank presents the check to the Fed for payment. The Fed honors the check by increasing the reserve account of the seller’s bank at the Federal Reserve Bank. The reserves of the seller’s bank increases, allowing the seller’s bank to make additional loans if it so chooses.
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Unformatted text preview: Just the opposite occurs when the Fed sells treasury securities. The payment from the buyer reduces the reserve account of the buyers bank at the Federal Reserve Bank. The reserves of the buyers bank decreases, reducing the future loans the buyers bank is able to make. Treasury securities come in basically three flavors. Treasury bonds have a life of over 10 years. Treasury notes have a life from 2 to 10 years, and Treasury bills have a life of one year or less. Treasury bills are the instrument primarily used by the Fed to manipulate the money supply. Open Market Operations are a very powerful monetary policy tool that can be used with subtlety. 24...
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This note was uploaded on 12/29/2011 for the course ECO 210 taught by Professor Malls during the Fall '10 term at SUNY Stony Brook.

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