Question

When the fed buys government securities, banks' reserves ________, the quantity of money ________, and the federal funds rate _______

Answer 1

By acquiring government assets, the Fed helps to boost bank reserves and bring down the federal funds rate. Government securities will be sold by the Fed on the open market. In order for the federal funds rate to increase and the amount of money to fall, the Fed sells government assets.

What is government securities?

Government debt is issued in the form of government securities, which are then used to pay for military and infrastructure projects as well as ongoing operations. They frequently make periodic coupon or interest payments and guarantee the complete repayment of invested principal at security maturity. The U.S. Department of the Treasury issues debt obligations under the name "Treasury securities," which includes Treasury bills, notes, and bonds. Because they are backed by the full faith and credit of the United States government, Treasury securities are among the safest investments.

The minimal amount of cash that financial institutions must keep on hand in order to comply with central bank standards is known as bank reserves. The bank must store this actual paper money in a vault on the property or in an account with the national bank.

Hence, By acquiring government assets, the Fed helps to boost bank reserves and bring down the federal funds rate. Government securities will be sold by the Fed on the open market. In order for the federal funds rate to increase and the amount of money to fall, the Fed sells government assets.

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