Case Study : Open Market Operations

1281 WordsDec 21, 20156 Pages
RSCH 202 - Introduction to Research Methods Embry-Riddle Aeronautical University Anesha Bird Introduction “Open market operations involves the Federal Reserve buying or selling treasury bonds in the open market” (Investopedia.org). This economic shaping tool alters interest rates in that open market operations can increase or decrease the total supply of money and it can also affect interest rates. “When the Federal Reserve buys bonds in the open market, it increases the money supply in the economy by trading bonds in exchange for cash in order to give to the general public” (Investopedia.org). Likewise, when the Federal Reserve sells bonds, it decreases the money supply by removing cash from the economy in return for bonds. As a result, open market operations has a direct effect on cash flow. Open market operations also affects interest rates because if the Federal Reserve buys bonds, prices are pushed higher and interest rates decrease, making low-interest loans very attractive to consumers and if the Federal Reserve sells bonds, it pushes prices down and rates increase, causing higher interest loans and less economic activity in the economy. The problem with open market operations is that it is only a short-term fix for stabilizing the economy and could potentially cause the downfall of an economy if misappropriated leading to an economic recession. So people wonder if we should even have a Federal Reserve in the first place, due to the fact that some

More about Case Study : Open Market Operations

Open Document