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Open Market Operations During the Recent Financial Crisis - Book Report/Review Example

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The paper "Open Market Operations During the Recent Financial Crisis" states that When the financial crisis began in 2008 and the economy started experiencing recessionary pressures, the Fed started reducing interest rates to provide impetus to the market. Finally, in December 2008, the interest rates reached its lowest at 0-0.25 per cent. …
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Open Market Operations During the Recent Financial Crisis
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"Open Market Operations During the Recent Financial Crisis"

Download file to see previous pages Primary credit is given to depository institutions for a very short-term (overnight). The primary credit is available to institutions with sound financials. The institutions not eligible for primary credit may go for secondary credit to meet their short-term liquidity requirements. The smaller depository institutions go for seasonal credit to meet their funding needs during their lean periods. The examples are agricultural banks. The discount rate for primary credit is set above short-term interest rates. The rate on secondary credit is set above the primary credit rate. Open Market Operations called so because the Fed intervenes by purchasing and selling of US Treasury securities from the open markets. The objective is to set the federal funds rate. When the Fed buys the securities, it issues currency expanding money in the market and credit. Stability and sustainable economic growth were two objectives that were set out in its policy. When it sells securities, it contracts the money supply and credit in the market.
Monetary policy affects economy in the short as well as long run. In expansionary policy, interest rates set reducing and this enhances interest-sensitive spending such as capital equipments, housing construction, consumer-durable spending including automobiles and other households. Thus, expansionary monetary policy brings the economy out of recession. When the economy is overheated and inflationary, the Fed raises interest rates and reduces the money supply and credit availability and thereby managing the inflation rate. Looking retrospectively, when the US economy was in grip of recession during 2001 through 2003, the Fed kept funds rate low that reached 1% by mid-2003. As the monetary expansion took place and price began to rise, the Fed gradually increased interest rates slowly to reach 5.25% in mid-2006. When the financial crisis began in 2008 and the economy started experiencing recessionary pressures, the Fed started reducing interest rates to provide impetus to the market. Finally, in December 2008, the interest rates reached its lowest at 0-0.25 per cent.  ...Download file to see next pagesRead More
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