econ 130

Topics: Monetary policy, Central bank, Excess reserves Pages: 2 (345 words) Published: November 14, 2013
1)They would undertake a defensive open market sale.

Flexibility: Open market operations can be used to conduct a small purchase or sale of securities. Conversely, if the desired change in reserves or the base is very large, the open market operations tool is strong enough to do the job through a very large purchase or sale of securities

Reversibility: Open market operations are easily reversed. If a mistake is made in conducting an open market operation, the Fed can immediately reverse it.

Effectiveness: It is costly to adjust computer system; therefore a change in reserve requirements would be burdensome to banks. The policy tool of changing reserve requirements does not have much to recommend it, and it is rarely used.

Speed of implementation: Open market operations can be implemented quickly; they involve no administrative delay.

23) The switch from deposits into currency lowers the amount of reserves and lowers the supply of reserves at any given interest rate, thus shifting the supply curve to the left. The fall in deposits also leads to lower required reserves, shifting the demand curve to the left. However, because the fall in required reserves is only a fraction of the fall in the supply of reserves (because the required reserve ratio is much less than one), the supply curve shifts left by more than the demand curve. So if the discount rate is initially above the fed funds target, the fed funds rate will rise. However, if the fed funds rate is at the discount rate, then the fed funds rate will remain at the discount rate. 25) a. As checkable deposits increase, banks will have to hold more reserves (for fixed required and excess reserve ratios). The demand for reserves will shift to the right, causing the federal funds rate to increase. If the increase in reserve demand is large enough, the federal funds rate may rise as high as the discount rate. It will not rise above the discount rate, since any rate above id will cause banks...
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