Question

The Federal Reserve cannot predict the effects of open market operations with perfect accuracy because of:

1. Changes in people's desire for cash.
2. Foreigners' desire to hold U.S. dollars.
3. Banks' desire to hold excess reserves.
4. All of the above.

Answer 1

The accuracy of the Federal Reserve in predicting the effects of open market operations is compromised by various factors including changes in cash demand, foreign demand for U.S. dollars, and banks' reserve holding preferences, all affecting the federal funds rate.

Step-by-step explanation:

The Federal Reserve's ability to anticipate the effects of open market operations with perfect accuracy is hindered by several factors, including:

1. Changes in people's desire for cash.
2. Foreigners' desire to hold U.S. dollars.
3. Banks' desire to hold excess reserves.

Each of these factors can affect the supply and demand for money and, consequently, the interest rate targeted by open market operations – the federal funds rate. Variations in these factors mean that while the Fed uses open market operations as a precise and powerful means of executing monetary policy, it cannot predict outcomes with absolute certainty.