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Federal Funds Case Summary

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a. The idea behind the Feds selling Treasury securities is to increase the federal funds rate. When doing so, the prices of the securities are going to go up, therefore, creating an upward pressure on the prices of the federal funds rate. These actions are done by the trading desk at the New York Fed, once instructed they will sell the securities to the highest bidder.
b. The prices of Treasury Bills are going to go up, thus an upward pressure is going to be applied to the treasury yields. The action of buying Treasury securities is done in order to increase a money supply throughout the economy. If one has a higher priced security, then their return (if they hold it until maturity) is going to be lower. These Treasury yields will not …show more content…

Financial Institutions could potentially see an abundant weakening in the amount of loans they contribute out. No one is going to want to take out loans whenever they have to pay a superior percent of interest in return. One of the arguments of a restrictive monetary policy is to cutback economic growth – doing so by raising the interest amounts. This could halt deficit units from borrowing money from financial institutes until interest rates go back down or at least from borrowing large amounts of money for upcoming developments. The credit risk is going to unquestionably increase because financial institutions are going to be taking a much larger risk of lending out loans. These deficit units are going to have to find some large amount of security (possibly) to put up, because financial institutions will not just be “handing out” money with the risk going up. Performance of financial institutions are going to drop in the amount of money they are willing to be lending out. Borrowers, who are already considered to be the deficit unit, will not want to get a loan at a high percent of interest. So financial institutions who currently give out credit to deficit units are going to see the numbers in their books go

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