Question

If demand for reserves is predected to decrease temporarily, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

dynamic; inject

defensive; drain

dynamic; drain

defensive; inject

Answer 1

Option B.

• Defensive open market operations are those monetary policy actions that are not used by Fed to bring changes to the money supply within an economy.
• It is rather used by Fed to offset fluctuations in demand and supply of money or reserves within the economy.
• If Demand for reserves is predicted to decrease temporarily, the manager of New York Fed bank will conduct defensive open market operations.
• This will drain all the reserves to offset an expected increase in reserve's.