Under which circumstance is the Fed most likely to carry out a defensive open market operation?
A) to prevent an increase in inflation
B) if a snowstorm results in a delay in check clearing, resulting in an increase in the Federal Reserve float
C) to defend the value of the U.S. dollar on the foreign exchange market
D) to prevent the negative impact of a demand shock

Question

Quizplus · Accepted Answer

Defensive open market operations are typically conducted to address short-term factors affecting bank reserves and the federal funds rate, such as temporary disruptions in the banking system. An increase in the Federal Reserve float due to a delay in check clearing, as might happen after a snowstorm, is an example of such a short-term factor. These operations are aimed at maintaining the current stance of monetary policy rather than changing it, which distinguishes them from actions taken to directly influence inflation, exchange rates, or broader economic conditions.

Under Which Circumstance Is the Fed Most Likely to Carry