Chapter 15, Problem 1Q

To determine

The suitable defensive open market operations to minimize monetary shocks from a snowstorm in NY.

Explanation of Solution

Defensive open market operations are done to minimize the market misbalance caused due to unforeseen and unanticipated conditions. These are broadly categorized into two: Repurchase agreement (Repo), and Matched sale-purchase transaction (Reverse repo).

The manager of the open market desk will counter the effects of the inflated monetary base with a strategy to undertake a defensive open market sale. The rise in the floats will be restricted to a minimum since the banks will not be able to process its checkable facilities.

This will help the desk control the fluctuations that occurred in NY by the disposal of securities that can be brought back in a short period. The short period of return of securities will help the Federal Reserve to restock with reserves through the repurchase of the securities as soon as they can.

Economics Concept Introduction

Introduction: Defensive open market operations are executed to control the unfavorable movements in factors that either negatively or positively affect the monetary base. These movements include the changes in Treasury Deposits with the Federal Reserve or changes in the float.