{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

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

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
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 B k Th f th ll ’ b k i ll i th ll ’ b k t Bank. The reserves of the seller’s bank increases, allowing the seller’s bank to make additional loans if it so chooses. Just the opposite occurs when the Fed sells treasury securities.
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Just the opposite occurs when the Fed sells treasury securities. The payment from the buyer reduces the reserve account of the buyer’s bank at the Federal Reserve Bank. The reserve’s of the buyer’s bank decreases, reducing the future loans the buyer’s 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...
View Full Document

{[ snackBarMessage ]}