Open Market Operations, Defined

2 questions on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Exam level

The FOMC buys U.S. government securities in the open market. Which sequence follows?

A. Reserves rise, money supply expands, short-term rates fall B. Reserves fall, money supply contracts, short-term rates rise C. Reserves rise, money supply expands, short-term rates rise D. Reserves fall, money supply expands, short-term rates fall

How sure are you?

Sure Fairly sure Guessing

Correct: A. Paying for the securities credits the selling banks' reserve accounts, so reserves rise, banks lend the surplus, and short-term rates fall.

B. That is the chain for a Fed sale, not a purchase.

C. Keeps the reserve step but reverses the rate; more lendable reserves cannot push borrowing costs up.

D. A purchase adds reserves rather than draining them, contradicting the stem's own action.

Unit: SIE outline 1.3.1

Question 2Harder

Major banks raise their prime lending rate right after the Federal Reserve raises its target range for the federal funds rate. Did the Federal Reserve set the new prime rate?

A. Yes, since prime always equals the Fed's target range exactly B. No; each bank sets its own prime rate, though it tends to track the federal funds rate C. Yes, because prime is another name for the discount rate D. No; prime is set by Congress, not by banks

How sure are you?

Sure Fairly sure Guessing

Correct: B. Each bank sets its own prime rate for its most creditworthy corporate customers; it tends to move with the federal funds rate because a bank's own cost of funds does, but tracking is not setting.

A. Prime is not defined as equal to the target range; it is each bank's own published number.

C. The discount rate is a separate, Fed-set rate charged at the discount window; prime is not another name for it.

D. Congress plays no role in setting the prime rate; commercial banks set their own.

Unit: SIE outline 1.3.1

The trick

Now answer