Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 16: Q.2 (page 436)

During the holiday season, when the public's holdings of currency increase, what defensive open market operations typically occur? Why?

Short Answer

Expert verified

During the holiday season, the public's holdings of currency increase because, the fed will purchase securities to inject funds into the financial system and make up for the shortage of funds in circulation.

Step by step solution

01

Concept Introduction

Open Market Purchase: It occurs when the Fed buys bonds in the open market (from dealers or banks) and releases currency in the market against these purchases.

02

Explanation

The Fed will conduct expansionary monetary policy when the public decides to hold more currency during the holiday season.

This means that the Fed will increase the money supply to make up for the reduction in currency circulation in order to control short-term interest rates.

To do so, the Fed will purchase securities from banks so that there will be an injection of funds into the financial system to make up for the shortage of funds in circulation.

03

Final Answer

Therefore during the holiday season, the public's holdings of currency increase because, the fed will purchase securities to inject funds into the financial system and make up for the shortage of funds in circulation.

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

Using the supply and demand analysis of the market for reserves, indicate how the following situations would affect central bank interest rates and economies in general.

a. The central bank eliminates interest paid on excess reserve.

b. The central bank introduces special interest rates (lower than usual) for commercial banks and sets special auctions.

c. The central bank conducts an open market sale of certain securities.

d. The central bank sets negative interest rates on bank deposits.

e. The central bank increases reserve requirements.

Following the global financial crisis in 2008, assets on the Federal Reserve’s balance sheet increased dramatically, from approximately \(800 billion at the end of 2007 to over \)4 trillion today. Many of the assets held are longer-term securities acquired through various loan programs instituted as a result of the crisis. In this situation, how could reverse repos (matched sale–purchase transactions) help the Fed reduce its assets held in an orderly fashion, while reducing potential inflationary problems in the future?

Why are repurchase agreements used to conduct most short-term monetary policy operations, rather than the simple, outright purchase and sale of securities?

Go to https://www.federalreserve.gov/releases/h15/. What is the current federal funds rate? What is the current Federal Reserve discount rate? (Define this rate as well.) Have short-term rates increased or decreased since the end of 2008?

“The federal funds rate can never be above the discount rate.” Is this statement true, false, or uncertain? Explain your answer.
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