Consider an expansionary open market operation. Suppose the Federal Reserve buys government securities
from the nonbank public.
Suppose that the sellers of government securities deposit the checks drawn on the New York Fed into their bank account. Then, ceteris paribus, bank reserves increase, decrease or do not change , currency in circulation increase, decrease or do not change , and thus the monetary base will increase, decrease or do not change .
Suppose now that the Federal Reserve wants to increase the monetary base by increasing bank reserves only. Which of the following actions enables the Fed to achieve its goal?
Lend to the non-banking public through the term auction facility
Lend to commercial banks through the term auction facility
Buy the government securities exclusively from the non-banking public
Require the non-banking public to repay discount loans
The Federal Reserve's control over the amount of government securities it buys or sells is stronger weaker, the same as than its control over discount window lending. This is because the Fed has complete control over the monetary base, discount rate, prices of government securities, banks wiliness to borrow funds .
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