Question

part 1: What are open market operations conducted by the Federal Reserve?

part 2: Supposed the Fed bought 100 million dollars of government securities, and suppose that the reserve requirement is .4. what is the money mulitiplier, and how much can the money supply potentially increase because of the purchase? explain fully.

Answer 1

1) Open market operations conducted by the Federal Reserve refers to the buying and selling of government securities to affect the money supply in the economy.When the Fed buys government securities,it increases the money supply in the economy and when the Fed sells government securities,it decreases the money supply in the economy

2) When the Fed bought 100 million dollars of government securities and the reserve requirement is 40%

Money multiplier = 1/R

=1/.40 = 2.5

Change in money supply = 100 million x 2.5 = 250 million

So,money supply would be increased by 250 million