Question

Both Federal Reserve Bank and its member banks buy and sell government securities, but for substantially different reasons. Explain why each does it in one sentence for each.

Fed:

Com. Bank:

Answer 1

Fed: Federal reserve buys and sells government securities in order to control the money supply. By purchasing securities, it pumps in more money in the economy and by selling the securities, it takes out money from the economy.

Commercial banks: they sell and purchase securities for individual bank's profitability. Securities contain interests. So by buying securities, banks are making more investments and when they are in short of reserves they sell these securities.