1)Describe how expansionary activities conducted by the Federal Reserve impact credit availability, the money supply, interest rates, and security prices.

2)suppose the Federal Reserve purchases $10 billion worth of foreign currency in exchange for deposit accounts at the Federal Reserve. Show the changes that result from this transaction on the Fed's balance sheet.

Answer 1: Expansionary policy increases the credit availability, money supply, and security prices, but it decreases the interest rates.

Answer 2: The foreign exchange reserve (asset) will increase by $10 billion and the deposit account (liability) will also increase by the same amount.

Step-by-step explanation

Answer 1)

Expansionary policy is a form of monetary policy which is adopted with the objective of increasing economic activity in the country. This policy increases the money supply and decreases the interest rates. As the money supply increases, credit availability in the whole country also increases. We know that there is an inverse relationship between the prices of the securities and the interest rates. When interest rates goes down, security prices moves up. Thus, expansionary policy leads to increase the prices of financial securities.

Answer 2)

If the Federal Reserve purchases foreign currency of $10 billions by exchanging deposit accounts, it would affect the balance sheet of Federal Reserve in two ways:

1)Asset side will increase by $10 billion in the form of foreign exchange reserve

2)Liability side will increase by $10 billion in the form of deposit account.