ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Slow economic growth
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An appreciating domestic currency
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Rising unemployment
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High inflation rates or Hyperinflation
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Detailed explanation-1: -When a central bank buys bonds, money is flowing from the central bank to individual banks in the economy, increasing the supply of money in circulation. When a central bank sells bonds, then money from individual banks in the economy is flowing into the central bank-reducing the quantity of money in the economy.
Detailed explanation-2: -The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down.
Detailed explanation-3: -The logic is based on a cascading effect: if central banks charge higher rates to commercial banks, commercial banks in turn increase the rates they offer to households and businesses who wish to borrow.
Detailed explanation-4: -OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase.