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    Open market operations

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    Let's say that I'm a member of the Federal Reserve and I'm speaking with a group of newly elected members of Congress to explain my operations. The members of Congress have asked me to address the following issues.

    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? use this example: lets say open market purchases of government bonds.

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    Solution Preview

    Open market operations are the principal tool used by the Federal Reserve to implement monetary policy.
    They are a powerful and flexible means of fostering conditions in the federal funds market that are consistent with policy objectives. It is one of the primary ways that the central bank can affect base money. It includes sales and purchases of second hand government debt. These purchases and sales of U.S. Treasury and federal agency securities largely determine the federal funds rate-the interest rate at which depository institutions lend balances at the Federal Reserve to ...

    Solution Summary

    Open market operations are assessed.