9 (Mishkin 18.2) During the holiday season, when the public\'s holdings of curre

Question

9 (Mishkin 18.2) During the holiday season, when the public's holdings of currency increase, 2/2 defensive open market operations typically occur? Why? 10. (Mishkin 18.6) "The federal funds rate can never be above the discount rate." Is this statement true, false, or uncertain? Explain your answer. 11. (Mishkin 18.15) Compare the methods of controlling the money supply-open market operations, loans to financial institutions, and changes in reserve requirements-on the basis of the following criteria: flexibility, reversibility, effectiveness, and speed of implementation. 12. (Mishkin 18.21) Why is it that a decrease in the discount rate does not normally lead to an increase in borrowed reserves? Use the supply and demand analysis of the market for reserves to explain.

Explanation / Answer

Open Market Purchase: It occurs when the Fed buys bonds in the open market (from dealers or banks) and releases currency in the market against these purchases.

During holiday periods, with the increase in public’s holding of currency, the money multiplier decreases (the currency– checkable deposits ratio increases and the money supply falls). To counter this decline in the money supply, the Fed, typically, conducts an open market purchase which leads to an increase in money supply in the market.

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