ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -By selling securities, the Fed attempts to raise rates, slow economic growth, and stem inflation. Unfortunately, contractionary economic periods like this also traditionally cause increases in unemployment.

Detailed explanation-2: -Raising rates can lead major businesses, particularly those that hold high amounts of corporate debt, to lay off workers or slow hiring. As a result, the unemployment rate increases, further slowing the circulation of money as consumer demand drops.

Detailed explanation-3: -As a result of increasing the cash supply, market interest rates will decrease. Therefore, adjusting the monetary base is another tool that central banks use to modify interest rates.

Detailed explanation-4: -If the Federal Reserve increases reserves, a single bank can make loans up to the amount of its excess reserves, creating an equal amount of deposits. The banking system, however, can create a multiple expansion of deposits.

Detailed explanation-5: -Monetary policy affects aggregate demand and inflation through a variety of channels. Adverse shocks, such as an oil price increase, can lead to higher unemployment and higher inflation. Many governments have given responsibility for monetary policy-often described as inflation targeting-to central banks.