Answer to Question #72391 in Macroeconomics for Sammy

Question

The Federal Reserve of the United States of America would like to decrease interest rates in the economy. What open market operation (OMO) action should the Federal Reserve undertake? Explain the OMO process in detail. What will happen to the cash rate, interest rates, inflation and GDP? Draw by hand the effect of the OMO process using a MD-MS diagram.

Answer 1

If the Federal Reserve of the United States of America would like to decrease interest rates in the economy, then the appropriate open market operation (OMO) action is to sell government bonds. After that the cash rate and interest rates will rise, inflation and GDP will decrease.