Question

theres this example in my textbook that states, "For example, a corporation with an account at sun trust bank in atlanta might buy $50,000 of securities. When its check reaches the atlanta federal reserve district bank, $50,000 is defucted from the reserves of sun trust bank." The book says that the fed sellls securities during periods of inflation. I am super confused by the example the book gave. If a corporation is buying securities doesn't that mean that they are loaning money to the feds which increases money supply? Why would the reserves be deducted and why do they only do this during inflation times?

Answer 1

Ans:

when fed buy or sell a security from its member bank, then it is known as open market operation. OMO. played the role of an important tool to increase or decrease interest rates. When the Fed sells security means it wants to make money from the market/bank. once the security will be sold the money will be deducted from the bank's reserve.   the bank money for lending purposes will be less. it means to lend money banks will put the restriction in terms of high-interest rate. this policy has been adopted by the Fed in the period of inflation to control money supply in the market.