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Explain dynamic and defensive open market operations. What is the purpose of each type? Describe two...

Explain dynamic and defensive open market operations. What is the purpose of each type? Describe two situations when defensive open market operations are used.

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Answer #1

Dynamic open market operations are used to permanently change the monetary base and monetary supply of overall economy by Federal Reserve.

Defensive open market operations are based upon offsetting temporary change in the monetary base and monetary supply of overall economy by Federal Reserve.

Purpose of dynamic open market operation is to change the level of reserves and the monetary base.

Purpose of defensive open market operation is to offset the movement in other factors that affect reserve and monetary base such as changing the treasury deposits with the Federal Reserve.

Two situations when defensive open market operations are used-

A.Defensive open market operations are used to offset float and Shift in treasury balances

B. Defensive open market operations are also used for temporary changes in currency.

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