Suppose the Federal Reserve sells government-issued securities to the market and issues repurchase agreements to financial institutions. Explain whether these practices are examples of expansionary or contractionary monetary policy and why.
Selling government-issued securities to the market is contractionary monetary policy due to it's expanding the amount of money in circulation.
The Federal Reserve selling government-issued securities to the market and issuing repurchase agreements to financial institutions are examples of expansionary monetary policy because it contracts the money supply. Both actions increase the amount of money in circulation.
The Federal Reserve selling government-issued securities to the market is an example of contractionary monetary policy. This action reduces the amount of money in circulation.
The Federal Reserve selling government-issued securities to the market and issuing repurchase agreements to financial institutions are examples of contractionary monetary policy. This reduces and expands the money supply.
The correct answer is:
The Federal Reserve selling government-issued securities to the market is an example of contractionary monetary policy. This action reduces the amount of money in circulation. This is because when the Federal Reserve sells securities, it essentially takes money out of the economy, reducing the overall money supply.
However, issuing repurchase agreements to financial institutions is an example of expansionary monetary policy. This is because when the Federal Reserve issues repurchase agreements, it is essentially injecting money into the economy. Repurchase agreements involve the Federal Reserve buying government securities from financial institutions with the agreement to sell them back at a later date, effectively providing temporary liquidity to these institutions.
So, these two practices can be seen as counterbalancing each other. The selling of government securities reduces the money supply, while the issuance of repurchase agreements increases the money supply. The overall impact on monetary policy will depend on the relative magnitudes of these actions.