ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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If the Federal Open Market Committee decides to decrease the money supply, then the Federal Reserve
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buys government bonds from its portfolio to the banks/bond traders.
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buys various types of stocks and bonds from its portfolio to the banks/bond traders.
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takes dollars out of the money supply by selling government bonds to the banks/bond traders.
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Detailed explanation-1: -By buying or selling bonds, bills, and other financial instruments in the open market, a central bank can expand or contract the amount of reserves in the banking system and can ultimately influence the country’s money supply. When the central bank sells such instruments it absorbs money from the system.
Detailed explanation-2: -So the first thing that happens with a decrease in the money supply is that interest rates rise. As interest rates rise, businesses are less willing to invest to borrow for investment spending. And consumers, too, are less willing to borrow to buy cars and homes and so on. Thus spending decreases.
Detailed explanation-3: -Conduct open market sales. In open market sales, the Federal Reserve gives the public government bonds in exchange for money. The money moves from the public to the government. Therefore, this is a contractionary monetary policy as it causes a reduction in the amount of money circulating in the economy.