Question

Discuss in-depth the effect of Federal Reserve operations/activities below on interest rates level in market (increase or decrease)? Justify your answer in details?

a) Open market purchases of securities by the Fed Reserve

b) The Federal Reserve Increases Reserve Requirement Ratio

Answer 1

a) Open market purchases of securities by the Fed Reserve decreases the interest rate.

This happens because When the Federal Reserve buys bonds, bond prices go up, which in turn reduces interest rates, the Fed buys bonds with cash. The countries, firms, and individuals that the Fed bought bonds from now have more cash. Since they have more cash, the money supply has increased. Open market purchases increase the money supply, which makes money less valuable and reduces the interest rate in the money market.

b) If The Federal Reserve Increases Reserve Requirement Ratio the interest rate increases.

This is because, Raising the reserve requirement reduces the amount of money that banks have available to lend. Since the supply of money is lower, banks can charge more to lend it. That sends interest rates up.