The Federal Reserve uses Open Market Operations as their primary tool of monetary policy. It's favored because it is flexible, which means it can used on short notice. The Federal Reserve actually uses it everyday, but to a lesser extent, it's only when the economic situation is more severe that they use it to a greater extent. OMO works by buying and selling government bonds, which influences the base money supply as well as interest rates. This in turn affects the aggregate money supply, expanding or shrinking it. They exercise OMO until an economic goal is reached, such as a certain interest rate, inflation, etc.
Expansionary activities by definition are meant to expand the economy, more money supply, lower interest rates, and to boost employment,
…show more content…
Businesses then use these new funds to expand the economy. What this also does is it increases the prices of securities, which means lower yields for investors, they then seek other investments that will provide higher yields, stimulating the economy through investment diversity. These activities can induce inflation however, so the Fed has to be cautious about using such measures. If the Federal Reserve bought 10 billion of foreign currency, it would mean they think that the
United States dollar is too strong. To weaken it they would buy the currency, which increases their assets on the balance sheet, and it also increases the total money supply in the country.
They can allow this to change the monetary base or not, if they do it's called unsterilized foreign exchange intervention, if they don't it's called sterilized foreign exchange intervention.
Wikipedia,. (2015). Open market operation. Retrieved 8 October 2015, from https://en.wikipedia.org/wiki/Open_market_operation Oocities.org,. (2015). Internatinal Financial System Lesson
10. Retrieved 8 October 2015, from http://www.oocities.org/szulczyk/lessons/international_lecture_10.html Federalreserveeducation.org,. (2015). Monetary Policy Basics Federal
Reserve