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Open-market purchases permit reductions in currency revenues and thus a lower inflation rate.
Member rating: No Rating | Words: | Submitted: Sat Jul 10 2004
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BUS305-10, Unit 5, IP Open-market purchases permit reductions in currency revenues and thus a lower inflation rate. The reduction in interest rates engineered through open-market purchases always yield smaller increases in the inflation rate than a reduction brought about by other means, such as a decrease in the required reserve ratio (the ratio of required reserves to the required deposits in given Fed banks). A policy-maker who prefers low inflation and henceforth a reduction in real interest rates should prefer open-market purchases. It is said that it is best to buy low and sell high in the case of long-term bonds, which are essentially IOUs, promises to repay a given amount of money within a specified time and often, by a specific date. Purchases of Treasury securities supply the necessary reserves to the banking system and consequently, downward pressure on the funds rate. Sales remove the reserves and put upward pressure on...
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