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Open - Market Operations

The Federal Reserve's main asset is its portfolio of securities, mostly government securities valued at $2,358. Its main liability is the monetary base at $2,506. Decisions by individuals and banks impact the money multiplier and supply, as banks create new money through lending when they receive reserves from the Fed. The Fed has four tools to affect the money supply: open market operations, setting the discount rate, changing the interest rate on bank reserves, and adjusting reserve requirements for depository institutions.

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49 views1 page

Open - Market Operations

The Federal Reserve's main asset is its portfolio of securities, mostly government securities valued at $2,358. Its main liability is the monetary base at $2,506. Decisions by individuals and banks impact the money multiplier and supply, as banks create new money through lending when they receive reserves from the Fed. The Fed has four tools to affect the money supply: open market operations, setting the discount rate, changing the interest rate on bank reserves, and adjusting reserve requirements for depository institutions.

Uploaded by

kim
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Tualla, Diana M.

1. What are Federal Reserves major assets and liabilities? What are the relative
amounts of each?
The main asset of the fed is its portfolio of securities, mostly government
securities. On the liability side of the balance sheet, the monetary base is the main
item.
Securities = 2,358
Monetary base = 2,506
2. Discuss how decisions by people and bank affect the multiplier and the money
supply.
It is because all measures of the money supply include transactions deposits, the
example of how banks create money shows that the total increase in money supply
equals a multiple of the original amount of reserves the Fed introduces into the
banking system by increasing the monetary base through open market operations.
3. What are the Feds four tools for affecting the money supply?

The Fed has four main tools for affecting the money supply.
Open market operations
The Fed constantly buys and sells U.S. government securities in the Financial
Markets, which in turn influences the level of reserves in the banking system.
Setting the Discount rate
This is the interest rate that banks pay on short-term loans from a Federal reserve
bank.
Changes in the interest rate on banks reserves balance
The feds third tool is the interest rate the Fed pays to banks on their reserve
balance held at the fed.
Changes in reserve requirements
This is the amount of physical funds that depository institutions are to hold in
reserve against deposits in bank accounts.

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