At a recent conference The Fed Where is it Going?, Jason Alexdrovitch was discussing the policy tools that the U.S. central bank uses to control the money supply. During the conference he made the following statements: Statement 1: If the Fed wanted to use all of its three major monetary policy tools to increase the money supply, the Fed would sell bonds, reduce the discount rate and increase bank reserve requirements. Statement 2: If commercial banks are increasing their borrowings from the Federal Reserve banks, while the Fed is selling government securities, the borrowing of the commercial banks from the Fed will offset the effects of open market operations. Are Statement 1 and Statement 2 as made by Alexdrovitch correct? Statement 1 Statement 2 A) Incorrect Incorrect B) Correct Incorrect C) Incorrect Correct D) Correct Correct The correct ans. is given as C but I think it could be A. The amount of money Fed got from selling securities and what banks got from borrowings is not given. What ya say???
C) Incorrect Correct edit: yeah i guess you already answered that, anyway i guess their point was as to whether or not the banks could offset the effect of selling securities in the open market by borrowing from the fed and the answer is yes
Yeah, I think the point they are trying to make is that when the govt. sells securities, they can lend that money right back out to the banks through the discount rate borrowing. Then the money is basically just circulating through the Fed.