Question

On March 15, 2020, in response to the coronavirus outbreak, the Federal Open Market Committee directed...

On March 15, 2020, in response to the coronavirus outbreak, the Federal Open Market Committee directed the New York branch of the bank to purchase government securities (bonds) from commercial banks.

What impact will this have on the interest rate and on the money supply?

Homework Answers

Answer #1

As the newyork branch of the bank is purchasing government securities.

Purchase of government securities mean infusing money into the market

It will infuse liquidity into the market ( more money for commercial banks to lend out), which leads to an increase in money supply.

As money supply increases, the Ms curve to the right causing a reduction in interest rate.

As seen from the graph as Ms shifts to the right, the interest rate reduces from r1 to r2.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The Federal Open Market Committee decided that the federal funds rate should be 1.5-1.75% rather than...
The Federal Open Market Committee decided that the federal funds rate should be 1.5-1.75% rather than the current rate of 1.75-2%. The appropriate open market action is to _____ Treasury bills to _____ money _____. purchase; increase; demand purchase; increase; supply sell; decrease; demand sell; decrease; supply
51. Which statement about the Federal Open Market Committee is untrue? (a) the Secretary of Treasury...
51. Which statement about the Federal Open Market Committee is untrue? (a) the Secretary of Treasury always is a voting member of the Committee on monetary policy decisions; (b) the President of the New York Fed, by tradition, always is a voting member on policy matters; (c) the Committee formulates, but does not implement, monetary policy; (d) its policy decisions do not require a consensus among voting members. 52. An open market operation designed to add reserves to the banking...
Please briefly explain what the open market operations are. (hint: use “government bonds”, “Federal Reserve Banks”,...
Please briefly explain what the open market operations are. (hint: use “government bonds”, “Federal Reserve Banks”, and “Money Supply” in your explanation.)
1. A fiscal polciy offset will occur whenever A) the price level rises. B) the interest...
1. A fiscal polciy offset will occur whenever A) the price level rises. B) the interest rate rises. C) the government increases spending in an area that competes with the private sector. D) a, b, and c. 2.  During normal times, discretionary fiscal policy A) is more effective in influencing real GDP than at times of a recession. B) works well because there are no lag problems in influencing real GDP. C) is probably not very effective in influencing real GDP...
If you hear in the news that the Federal Reserve Bank conducted open market purchases of...
If you hear in the news that the Federal Reserve Bank conducted open market purchases of government securities, then you should expect _____ to increase a. the reserve to deposit ratio b. the reserve requirement c. the discount rate d. the money supply
An open market purchase of government securities (such as Treasury Bills) by the Central Bank will...
An open market purchase of government securities (such as Treasury Bills) by the Central Bank will decrease the money supply and raise the interest rate. you can say true or false.
If the head of the central bank wants to expand the supply of money, which of...
If the head of the central bank wants to expand the supply of money, which of the following would do it? Explain how the policy impacts the money supply, and find the policies that might increase the money supply. 1. Increase the required reserve ratio 2. Decrease the required reserve ration 3. Increase the discount rate 4. Decrease the discount rate 5. Buy government securities in the open market 6. Sell government securities in the open market 7. (Review for...
1. When the Fed purchases government bonds, that tends to ___ the federal funds rate and...
1. When the Fed purchases government bonds, that tends to ___ the federal funds rate and ___ the prime rate. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease e. None of the above 2. How does the Federal Reserve affect the supply of money using open market operations? a. The Fed increases the reserve requirements of bank and thus banks must obtain additional funds from the Fed. b. The Fed buys government bonds from banks, which...
1. The federal funds market is the market in which A. banks borrow from the Federal...
1. The federal funds market is the market in which A. banks borrow from the Federal Reserve Banks. B. US securities are bought and sold. C. Federal Reserve Banks borrow from one another. D. banks borrow reserves from one another on an overnight basis 2. If a corporation goes bankrupt, A. stockholders must honor the debts to bondholders out of personal assets if necessary. B. neither stockholders nor bondholders receive any money. C. bondholders get paid from the sale of...
20 Open market operations refer to the purchase or sale of ________ to control the money...
20 Open market operations refer to the purchase or sale of ________ to control the money supply. corporate bonds and stocks by the Federal Reserve U.S. Treasury securities by the Federal Reserve corporate bonds and stocks by the U.S. Treasury U.S. Treasury securities by the U.S. Treasury