Question

If the manager of the open market desk hears that a snowstorm is about to strike New York City, making it difficult to present checks for payment there and so raising the float, what defensive open market operations will the manager undertake?

Short answer

Defensive open market operations are done to attenuate the market misbalance caused thanks to unforeseen and unanticipated conditions. These are divided into two parts :

Repurchase agreement(Repo)

Matched sale-purchase transaction (Reverse repo)

Step-by-step solution

Concept Introduction

Defensive open market operations are executed to regulate the unfavorable movements in factors that either negatively or positively affect the monetary base. These movements include the changes in Treasury Deposits with the FRS or changes within the float.

Content Explanation

The manager of the open market desk will counter the results of the inflated monetary base with a technique to undertake a defensive open market sale. the increase within the floats are going to be restricted to a minimum since the banks won't be ready to process its checkable facilities. This will help the desk control the fluctuations that occurred in NY by the disposal of securities which will be brought back in a very short period. The short period of return of securities will help the Federal Reserve to restock with reserves through the repurchase of the securities as soon as they will.