Discuss how the Fed selling securities in the open market ripples ...

[khang]

Discuss how the Fed selling securities in the open market ripples through the different sectors of the economy.
 
  What will be an ideal response?

Question 2

Which of the following expenditures is classified as a mandatory expenditure of the U.S. federal government?
 
  A) federal employee salaries
  B) national defense
  C) Medicaid
  D) foreign aid

[welcom1000]

Answer to Question 1

When the Fed sells securities in the open market it raises the federal funds rate. Banks' reserves decrease, in turn decreasing the quantity of money. The supply of loanable funds decreases so the real interest rate rises. The higher real interest rate decreases investment and consumption expenditure, especially consumption expenditure on durable goods. In the foreign exchange market, the higher interest rates increase the attractiveness of U.S. securities. Foreigners increase their demand for U.S. dollars in order to purchase these securities and so the price of the dollar rises on the foreign exchange market. The rise in the price of the dollar makes exports more expensive to foreigners and imports less expensive to U.S. residents. As a result, exports decrease and imports increase so that net exports decrease. All of the changes decrease aggregate demand.

Answer to Question 2

C

[khang]

TYSM

[tkempin]

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