Federal Reserve

Paper Summary:

This paper discusses how the open market operations of the Federal Reserve affects money supply and interest rates. The writer notes that such operations are called open market operations because they involve the buying and selling of government debt instruments on the open market. Further, the writer points out that the purpose of such sales is to influence the size of the money supply and the levels of interest rates.

From the Paper:

"The Federal Reserve conducts open market operations that involve the purchase and sale of government bonds and has done so for decades. First, this raises the question of the purpose of such operations, aside from the method. Such operations are called "open market operations" because they involve the buying and selling of government debt instruments on the open market. The purpose of such sales is to influence the size of the money supply and the levels of interest rates. The reason this works is that when the Fed buys U.S. government securities, payment is by check drawn on the Fed's own account with itself. The sellers of the securities deposit these checks in their own accounts at the Federal Reserve Bank. This gives the private banks extra reserves they may use to extend additional loans to customers, and this expands the money supply and helps lower interest rates. "

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