Answer and Explanation:
Role of FOMC:
it takes the responsibility of open market operation which is the important tool to control the manetary policy in the economy.
three major policies of FOMC:
- open market operations
- discount rate
- reserve requirement
open market operations is the tool of manetary policy through open market operations, government will buy and sale the government securities and bonds in the market to control the inflation and deflation in the economy.
discount rate is the interest rate where the reserve bank charges on borrowing funds from the financial institutions at short term basis.
reserve requirement is the percentage of deposits, where the banks should hold some amount as reserves.
equation used to measure the bank reserves is given by:
bank reserves = bank's deposit at central bank + vault cash
bank reserves = required reserves + excess reserves
federal funds rate is the interest rate which is charged by the banks to lend the reserves to other banks overnight.
federal funds rate as a part of open market operation to operate the target of the federal reserves:
in order to operate the open market operation, federal open market committee uses the tool of federal funds rate. by changing the federal funds rate, it will influence the short term interest rates, long term interest rates, foreign exchange rates etc.
