You are the director of the trading desk of the Federal Reserve Bank of New York and your job is to implement the new interest rate target using open market operations. In order to change the money supply such that the market clears at a federal funds rate of 5.25 percent, you instruct your bond traders to
[ Select ]
buy
sell
treasury bonds and
[ Select ]
to get paid for the bonds by debiting
to pay for the bonds by crediting
the reserve accounts of the participating commercial banks.

Question

You are the director of the trading desk of the Federal Reserve Bank of New York and your job is to implement the new interest rate target using open market operations. In order to change the money supply such that the market clears at a federal funds rate of 5.25 percent, you instruct your bond traders to 
[ Select ]
buy
sell
 treasury bonds and 
[ Select ]
to get paid for the bonds by debiting
to pay for the bonds by crediting
 the reserve accounts of the participating commercial banks.

BlackTom AI · Accepted Answer

To raise the federal funds rate to 5.25% the Fed must reduce the supply of reserve balances; the trading desk carries this out by selling Treasuries and debiting the reserve accounts of the purchasing banks.

1) Relevant concepts
- Open market operations (OMO): The Fed buys securities to increase reserves and lower the federal funds rate, or sells securities to decrease reserves and raise the rate.
- Federal funds market: Banks lend overnight reserves to one another; the federal funds rate is determined by supply and demand for reserve balances.
- Central bank accounting (operational effect): When the Fed sells securities to a bank, the buyer pays from its reserve account at the Fed, which is debited (reduced).

2) Step-by-step reasoning
- Desired policy: increase the federal funds rate (to 5.25%). Higher target requires fewer reserve balances available to banks.
- Action chosen: open-market sale of Treasury securities. The New York Fed instructs traders to sell Treasuries to banks or dealers.
- Transaction mechanics: a purchasing bank transfers payment by having its reserve account at the Fed debited by the amount of the purchase. The Fed’s holdings of securities fall and that bank’s reserve balance falls by the same amount.
- Market effect: the supply of reserves shifts left (smaller supply). With demand unchanged, the equilibrium overnight federal funds rate rises to the new target.

3) Intermediate accounting steps (illustrative)
- Sell $100 million Treasuries to Bank A.
- Bank A’s reserve account at the Fed: Reserve balance = Reserve balance − $100 million (debit).
- Fed securities holdings: Securities = Securities − $100 million (transfer to buyer).
- Net effect: aggregate reserves down $100 million → higher scarcity → higher fed funds rate.

4) Why this answer is correct
Selling securities removes reserves from the banking system, creating scarcity and pushing the federal funds rate up to the target. Debiting the reserve accounts is the payment method that reduces those reserves.

5) Why the other choices are incorrect
- Buying Treasuries would inject reserves (crediting banks’ reserve accounts), increasing supply and lowering the federal funds rate—opposite of the goal.
- Paying by crediting reserve accounts increases reserves directly, which would reduce, not raise, the federal funds rate.

Conclusion: The correct actions are to sell Treasury bonds and to get paid for the bonds by debiting the reserve accounts of the participating commercial banks—matching the provided answer.

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类似问题

If the Reserve Bank of Australia wishes to decrease the money supply, it should

If the Reserve Bank of Australia wishes to decrease the money supply, it should

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

Everything else constant, in the reserves market, if the supply of federal funds intersects the reserve demand curve on the flat section, an open market purchase

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希望你的学习变得更简单

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