Question

You are Chair of the Federal Reserve Board. In your meeting with the Federal Open Market Committee, the committee unanimously 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:
A. OMOs alter reserve requirement up or down. The money supply will increase when we use OMOs to decrease the reserve requirement.

B. Open market operations refer to manipulating the rate at 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 are the selling and buying of government securities. The money supply increases when selling occurs and contracts when buying occurs. OMOs work by changing the amount of excess reserves available in the banking system.

D. OMOs are the selling and buying of government securities. The money supply increases when purchasing occurs and contracts when selling occurs. OMOs work by changing the amount of excess reserves available in the banking system.

Answer 1

Answer:

Option D - OMOs are the selling and buying of government securities. The money supply increases when purchasing occurs and contracts when selling occurs. OMOs work by changing the amount of excess reserves available in the banking system.

Explanation:

During the press conference after the meeting if am been asked by a reporter to explain what OMOs are and how i will use them to increase the money supply, my reply will be: OMOs are the selling and buying of government securities. The money supply increases when purchasing occurs and contracts when selling occurs. OMOs work by changing the amount of excess reserves available in the banking system.