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Consider an expansionary open market operation. Suppose the Federal Reserve buys government securities from the nonbank public.

Open market operations versus discount loans

Consider an expansionary open market operation. Suppose the Federal Reserve buys government securities from the nonbank public.

Suppose that the sellers of government securities deposit the checks drawn on the New York Fed into their bank account. Then, ceteris paribus, bank reserves _________ (increase, decrease, or does not change) currency in circulation ____________ (increase, decrease, or does not change), and thus the monetary base will _________ (decrease or increase)

Suppose now that the Federal Reserve wants to increase the monetary base by increasing bank reserves only. Which of the following actions enables the Fed to achieve its goal?

1.Require commercial banks to repay discount loans

2. Lend to the non-banking public at the discount window

3.Lend to commercial banks at the discount window

4. Require the non-banking public to repay discount loans

By lending to commercial banks through the discount window, the Federal Reserve alters _____________ (currency in circulation, the discount rate, borrowed reserves, prices of government securities, or nonborrowed reserves) and thus affects ____________ ( prices of government securities, banks’ willingness to borrow funds, the discount rate, the monetary base)

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