ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds.

Detailed explanation-2: -When the Fed sells bonds to the banks, it takes money out of the financial system, reducing the money supply.

Detailed explanation-3: -The Fed sells bonds, which decreases the supply of federal funds, which raises the interest rate, which leads to a decrease in intended investment spending, aggregate demand and output.

Detailed explanation-4: -If the Fed wants to decrease the money supply, it can sell bonds, thereby reducing the reserves of the member banks that buy them. Because these banks would then have less money to lend, the money supply would decrease.

Detailed explanation-5: -How Do Open Market Operations Affect the Federal Funds Rate? As part of open market operations, when the Fed buys securities from banks, it increases the money supply and the banks’ reserves, which results in a reduction in the fed funds rate.