Question

Imagine working at the Trading Desk at the New York Fed. Explain whether you would conduct open market purchases or sales in response to each of the following events. Justify your recommendation.

a. The latest FOMC Directive calls for an increase in the target value of the federal funds rate.

b. For a reason unrelated to monetary policy, the Fed's Board of Governors has decided to raise the differential between the discount rate and the federal funds rate. Nevertheless, the FOMC Directive calls for maintaining the present federal funds rate target.

Short answer

a. The public banks would raise prime rates empowering home loan and credit rates to continue in seven days' time

b. It would bring down the interest rates.

Step-by-step solution

introduction

The securities exchange would likewise continue in similar headings according to the FMOC bearings. After which FOMC would raise subsidizing rates would prompt the adjustment of the official mission and, in the long run, all the repercussion impacts would prompt a decrease in cash supply.

explanation part (a)

At the point when the FMOC declares an adjustment of the objective for the government reserve rate, this would bring about the news moving through monetary business sectors alongside the effect on the financial and political scene. The public banks would raise prime rates empowering home loan and credit rates to continue in seven days' time.

explanation part (b)

Assuming the Feds have brought its differential up in between the discount rate and the administrative rate it would bring about the U.S. Government protections to supply be bought prompting control and bringing down of the cash. Ultimately, it would affect bringing down the interest rates.