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    Federal Reserve's open market operations

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    The Federal Reserve has traditionally conducted open market operations through the purchase and sale of government bonds. In principle, could the Federal Reserve conduct monetary policy through the purchase and sale of stocks on the New York Stock Exchange? Do you see any possible drawbacks to such a policy?

    Suppose the Federal Reserve purchased gold or foreign currency. How would this purchase affect the domestic money supply? [Hint: about open market purchases of government bonds.]

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    The Fed's open market operations affect the supply of money through the reserves of depository institutions. And the bank would in turn credit the security dealer's account for that amount. While the dealer's bank must keep a certain percentage of these new funds in reserve, it can lend and invest the remainder. As these funds are spent and respent, the stock of money and credit will eventually increase by much more than the original amount.
    <br>The key point here is that government bonds are risk free: they are backed by US government and are usually treated as ...

    Solution Summary

    The Federal Reserve's open market operations are examined.