Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 13: Problem 8

Suppose you read in the newspaper that all last week the Fed conducted open market purchases and that on Tuesday of last week it lowered the discount rate. What would you say the Fed is trying to do?

Short Answer

Expert verified
The Federal Reserve is attempting to stimulate the economy by increasing the money supply, which lowers interest rates, encouraging spending and investment.

Step by step solution

01

Analysis of open market purchases

Firstly, examine the concept of open market purchases. These are purchases of government bonds by the Federal Reserve. By doing so, the Fed effectively pumps money into the economy as it provides institutions and individuals with cash in exchange for their bonds.
02

Analysis of lowering the discount rate

Next, consider the action of lowering the discount rate. The discount rate is what banks have to pay when they borrow from the Federal Reserve. So, by lowering this rate, borrowing becomes cheaper. Cheaper loans encourage banks to lend more to the public, thus injecting more money into the economy.
03

Concluding the Fed’s actions

By combining both actions taken by the Fed - open market purchases and lowering the discount rate - it can be deduced that the Fed is trying to increase the money supply in the economy. An increase in money supply tends to lower interest rates, thereby encouraging businesses and individuals to invest and spend more. This kick-starts the economy and leads to increased economic activity.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Explain how market forces would determine the money supply under free banking.

What are the differences between the Fed and the U.S. Treasury?

The Fed has announced a new, lower target for the federal funds rate; in other words, the Fed wants to lower the federal funds rate from its present level. What does setting a lower target for the federal funds rate have to do with open market operations?

Explain how an open market sale decreases the money supply.

Explain how an open market purchase increases the money supply.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free