Question

Consider the two panels of Figure 16-2. Suppose that instructions in the latest FOMC Directive call for a monetary policy action aimed at pushing down the rate of interest prevailing in the economy. Use the appropriate panel of the figure to assist in explaining whether officials at the Federal Reserve Bank of New York's Trading Desk should buy or sell existing bonds.

Short answer

The desk should buy securities to decrease the interest rate in economy.

Step-by-step solution

FOMC Concept 

Federal Open Market Operations means buying & selling of government securities in open market. It is used as a monetary (quantitative) credit control tools.

• Central bank buys securities (giving commercial banks & public cash) - to increase money supply, liquidity in economy.
• Central bank sells securities (getting cash from commercial banks & public) - to decrease money supply, liquidity in economy

Interest Concept Explanation 

Interest rate is the price of money, so it is directly related to money supply.

More money supply implies low interest rates, & less money supply implies high interest rate in the economy.

• So, when central bank buys securities & increases money supply - it leads to lower interest rates in the economy.