Question

1.     Bank W borrows $10 million from the Federal Reserve and lends out $8 million to firm X and keeps $2 million in vault cash. Firm X deposits $6 million in a checking account at Bank Y and bank Y lends out $5 million to Firm Z. Firm Z buys farm equipment with the $5 million. The farm equipment spends the $5 million money on parts, rent, labor, interest and dividends.  $4 million of the farm equipment expenditures end up in checking accounts at various banks. The initial loan to bank W by the Fed:

		Increased the money supply by more than $10,000,000.
		Increased the money supply by less than $10,000,000.
		Did not change the money supply.
		Loans to banks by the Fed are not open market operations so they do not increase the money supply.

Answer 1

Loans to banks by FED are not open market operations so they donot increase the money supply .Open market operations is when the Federal Reserve buys or sells securities from its member banks. These are typically Treasury notes or mortgage-backed securities. Open market operations is the major tool the Fed uses to raise or lower interest rates.When the Fed want interest rates to rise, it sells securities to banks. It slows inflation and economic growth. When it wants to lower rates, it buys securities. Its goal is to lower unemployment and stimulate economic growth. The Fed sets its target for interest rates at its regular Federal Open Market Committee meeting.