Question

Open market operations are typically repurchase agreements. What does this tell you about the likely volume of defensive open market operations relative to the volume of dynamic open market operations?

Short answer

As most open market operations are repurchase agreements, which is a quick defensive open market action, the importance of defensive open market operations is more significant than dynamic open market operations.

Step-by-step solution

Concept Introduction

The volume of defensive Open market operations is lower than that of the volume of dynamic OMO because the repurchase agreements are mostly used to increase the supply of money or decrease it, so the banks would buy or sell bonds dynamically rather than defensively.

Explanation

The volume is of defensive open market operations relative to dynamic open market operations:A repurchase agreement is a temporary defensive open market operation that is used to counter any undesirable change in the level of the monetary base arising out of changes in float, Treasury's deposits at the Fed, etc.

Final Answer

As most open market operations are repurchase agreements, which is a quick defensive open market action, the importance of defensive open market operations is more significant than dynamic open market operations.