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Macroeconomics and Direct Lending in Market Operations

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Since February 2008 the Fed has been supplementing its open market operations with a greatly expanded program of direct lending (both overnight and short term 28 and 84 day loans) to commercial banks and commercial bank holding companies. It also initiated a program to buy commercial paper from money market funds.

A) Explain how this expanded Federal Reserve lending and commercial paper purchases affect supply and demand conditions in the Federal funds market.

B) As conditions in short term financial markets have improved the volume of funds lent under these programs by the Fed has decreased from a high of 1.5 trillion to about 600 billion outstanding. However, the Fed has increased substantially its purchases of longer term mortgage backed securities and treasury notes from banks. Thus, bank reserves are still vastly higher than then they were a year ago at this time. Why has this huge increase in reserves not touched off a surge in inflation.?

C) Once economic conditions improve and lender & borrower confidence levels start to return to normal how will the Fed’s ability to pay interest on bank’s reserve deposits help it prevent a sharp, inflationary, rise in the growth of lending and spending?

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Since February 2008 the Fed has been supplementing its open market operations with a greatly expanded program of direct lending (both overnight and short term 28 and 84 day loans) to commercial banks and commercial bank holding companies. It also initiated a program to buy commercial paper from money market funds.

A) Explain how this expanded Federal Reserve lending and commercial paper purchases affect supply and demand conditions in the Federal funds market.
Expanded Federal Reserve lending policies are increased lending. The objective is to increase the availability of funds with the commercial banks and commercial bank holding companies so that they increase their lending to consumers and businesses. This will increase the supply of money in the federal funds market.
Similarly, if the Federal Reserve ...

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Hatim Baxamusa, MBA
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  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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