Question

You are Chair of the Federal Reserve Board. In your meeting with the Federal Open Market Committee, the committee un-animously votes to increase the money supply using open market operations (OMOs). During the press conference after the meeting, a reporter asks you to explain what OMOs are and how you will use them to increase the money supply. You reply that:______.A. OMOs are the purchase and sale of government securities. To increase the money supply we will buy government securities which increases the amount of reserves in the banking system and fuels deposit expansion.
B. Open market operations refer to manipulating the rate which the FED loans to member banks. Increasing the money supply occurs when the FED lowers this rate, which increases the amount of excess reserves in the banking system.
C. OMOs refer to an increase or decrease of the required reserve ratio. Increasing the ratio will fuel deposit expansion and an increase in the money supply.
D. OMOs are the purchase and sale of government securities. To increase the money supply we will sell government securities, which increases the amount of reserves in the banking system and fuels deposit expansion.

Answer 1

You reply that "OMOs are the purchase and sale of government securities. To increase the money supply we will buy government securities which increases the amount of reserves in the banking system and fuels deposit expansion".

Option: A

Explanation:

The action of central bank to offer or take liquidity from or into a bank or a collection of banks in its exchange rate currencies is understood as an open market operation or OMO. The central bank is the only origin of such policy which may either purchase or sell the bonds of government on the open market or in what is now often the acceptable option, engage into a repo or protected lending agreement with a commercial bank: the central bank lend the monetary as a reserve over a given period of time and concurrently selects the qualified asset as security.

Here the Chair of the Federal Reserve Board explained OMO for the purpose of their use in the scenario of increasing money supply, by purchasing or selling the bonds or securities of public authorities to eligible bodies for the increment of assets in banking sector to drive the expansion of deposits.