The Multiplier Effect


Question Description

  1. Go to “FRB: Press Release—FOMC statement—December 16, 2009.”
  2. You should now find a press release from the Board of Governors of the Federal Reserve System, dated December 16, 2009, which discusses the decisions of the Federal Open Market Committee (FOMC) for that date.

This release also states that the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. Additionally, the release states that the FOMC has decided to gradually reduce “the pace” of such Fed purchases. Discuss why you believe that the FOMC has made such a decision, and explain the consequences of such a decision on the economy.

In your answer, discuss the Federal Reserve’s use of open-market operations to influence the money supply and the respective consequences of such actions. Include a discussion of the money multiplier effect in your response. Justify your conclusions and provide appropriate examples.

Using Microsoft Word, submit your responses in the form of a short paper (1 ½ - 2 pages).

By the due date assigned, submit your responses to the Submissions Area.

Assignment 2 Grading CriteriaMaximum Points
Discussed in detail reasons for the FOMC decision to reduce the number of purchases of government securities.


Discussed the consequences of the FOMC’s decision on the economy.


Discussed the Federal Reserve’s use of open-market operations to influence the money supply.


Justified ideas and responses by using appropriate examples and references from texts, Web sites, and other references.


Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation.




Tutor Answer

School: UIUC

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The multiplier effect
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The Multiplier Effect

Reasons for reduced purchasing of government securities
The Federal Open Market Committee is a central policing body that takes necessary
measures whenever it needs to correct a financial crisis. The decision to reduce the number of
purchases of government securities was influenced by the need to ease monetary conditions for
better economy maintenance. FOMC had to take action in improving and supporting the
mortgage lending and housing market which had been trying to grow but was faced by obstacles
like a deteriorating labor market (FOMC Statement, 2009).
Reducing the number of purchases of government security was a direct action to correct
the fact that the bond-buying program had suppressed mortgage rates in the year 2009. The one
percent rate had to be reduced to the near zero percent Fed Funds Rate. Buying of the
government securities is an expansionary measure that would accelerate money supply in the
mortgage industry, so FOMC had to reduce the purchase to ensure smooth transitions in the
houses' market. The speedy growth of the mortgage industry could have influenced inflation.
The consequence of the FOMC’s decision on...

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