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INSTRUCTIONS: DEFINE THE FOLLOWING TERMS AND CONCEPTS IN A CLEAR, CONCISE, AND EXPLICIT WAY. DEMONSTRATE THE...

INSTRUCTIONS: DEFINE THE FOLLOWING TERMS AND CONCEPTS IN A CLEAR, CONCISE, AND EXPLICIT WAY. DEMONSTRATE THE RELATIONS BETWEEN THEM!

a)Open market operations & expansionary vs. contractionary open

market operations;

b)Central bank money & federal funds rate;

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Answer #1

a) Open market operations & expansionary vs. contractionary open

market operations;

It is the market, where Fed buys and sells government bonds. Under expansionary market operation, Fed buys Government bonds and increase the money supply in the economy. Under contractionary market operation, Fed sells Government bonds and money flows back into the bank and decreases in the market.

b) Central bank money & federal funds rate;

FFR is the interest rate charged by banks on overnight lending. This borrowing is for emergency purpose and controlling money supply.

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