The FOMC will ______ securities to ________ the monetary base, through the open market desk.

Question

BlackTom AI · Accepted Answer

When the FOMC purchases securities through the open market desk, it increases the monetary base.

Relevant knowledge points: The Federal Open Market Committee (FOMC) implements monetary policy via open market operations conducted by the Federal Reserve Bank’s trading desk. The monetary base (high-powered money) equals currency in circulation plus reserves held by depository institutions at the Fed. Purchases and sales of Treasury securities change the Fed’s balance sheet and thus change reserves and the monetary base.

Step-by-step reasoning:
1. Operation: The Fed buys government securities from banks or the public. Payment is made by crediting the sellers’ reserve accounts at the Fed.
2. Balance-sheet effect: Fed assets increase (securities +$X) and Fed liabilities increase (reserve balances +$X). Commercial bank assets: securities decrease by $X (if sold) but reserves increase by $X.
3. Monetary-base impact: Because reserves at the Fed are part of the monetary base, an increase in reserve balances raises the monetary base by the amount of the purchase.

Numerical illustration (intermediate steps):
- Suppose the Fed purchases $100 million of Treasuries.
- Fed balance sheet: Securities +$100M; Reserves (liabilities) +$100M.
- Bank balance sheet: Securities −$100M; Reserves +$100M.
- Monetary base = currency + reserves; reserves rise by $100M so monetary base increases by $100M (assuming currency unchanged).

Why the correct answer is correct: Purchasing securities injects liquidity into the banking system by creating reserves, thereby increasing the monetary base. Thus “Purchase/increase” correctly describes the action and effect.

Why other options are incorrect:
- B) Purchase/decrease: purchase increases, not decreases, the monetary base.
- C) Sell/increase: selling securities drains reserves, so it decreases the monetary base.
- D) Sell/expand: selling contracts (reduces) the monetary base; “expand” is the wrong direction.

Final confirmation: The correct answer is A) Purchase/increase.

The FOMC will securities to __ the monetary base, through the open market desk.Single choice

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