Hey there, there are two concepts that are driving me crazy that I can’t just figure out. Anyone know? 1. I am seeing sources that state when a central bank engages in monetary policy and buys securities in open mark relations this in turn increases the reserve requirement. If the reserve requirement goes up this reduces money supply and therefore increases interest rates according to the LM curve of demand-which is contractionary. However, I am getting questions wrong on mocks where it states when a bank purchase securities this raises the prices of securities such as bonds, therefore lowering interest rates contributing to an expansionary monetary policy. What am I missing here? 2. According the IS curve of demand, when rates go up, investment goes down. However, according to demand of money supply, there is an inverse relationship where when rates go up, investors want that higher yield in investment and their demand for money goes down. What gives? Thank you to anyone that can explain and good luck to all tomorrow! Dave De Nicola Sent from my iPad
For your first question, the fed buying securities has nothing to do with reserve requirement.
When the fed buys securities in the open market, money supply goes up (I think this is early defeasance of treasuries - if you were holding T bonds and getting a coupon every period, now the Fed is buying the bond back at the current price s.t. you the investor now has the cash in hand while the bond is cleared from the Fed’s balance sheet). This is expansionary monetary policy, done to stimulate the economy. At the same time, the fed has several tools at its disposal to reduce interest rates (such as the Fed funds rate - overnight borrowing rate, the discount window borrowing rate). Higher money supply and lower rates --> expansionary monetary policy.