Question

Suppose the Federal Reserve wants to increase the money supply by increasing the lending potential of commercial banks. Assume the current reserve requirement for commercial banks is 8 percent. Now suppose the Fed wants the lending potential to increase by $250 billion, and it plans to use open-market operations to accomplish this goal.

Instructions: Enter your answer as a whole number.

a. If sales or purchases of government securities are the only instrument used in the open-market operations, the Fed will need to (buy or Sell)  buy  sell  government securities in the total amount of $     billion.

b. The Fed may also opt to use some amount of  (Click to select) (reverse repos or repos) to effectively  (Click to select) (lend money to or borrow money) from  commercial banks rather than permanently transfer ownership of the securities in order to obtain its goal.

 

Answer 1