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Teaching monetary policy: Understanding open market operations

The most important tool for implementing monetary policy—open market operations—can often be a confusing concept for students to grasp. Open market operations are the purchase and sale of U.S. Treasury and federal agency securities. The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). This objective can be a desired quantity of reserves or a desired price (the federal funds rate—the interest rate at which depository institutions lend reserve balances at the Federal Reserve to other depository institutions overnight).

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Skeeter Makepeace, an educator at McCallie School in Chattanooga, Tenn., shared a tip to help students better understand open market operations by using the phrases, "big equals buy" and "small equals sell." If the Fed wants to increase the money supply (make it bigger), it would buy government securities to put money into the economy. To decrease the money supply (make it smaller), the Fed would sell securities.

Thanks to Skeeter Makepeace for sharing this creative idea to enhance students' understanding of a tricky monetary policy concept!

By Jackie Morgan, economic and financial education representative, Nashville Branch