ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Under this system, the central bank sells securities in the market when it wants to reduce the money supply in the market. It is done to increase interest rates. This policy is also known as the contractionary monetary policy.

Detailed explanation-2: -When the Fed buys securities on the open market, cash is transferred to these banks, increasing the nation’s money supply. Conversely, when the Fed sells government securities, these banks have less cash available to them – a decrease in the nation’s money supply.

Detailed explanation-3: -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.

Detailed explanation-4: -In open market operations, the Federal Reserve buys or sells securities on the open market to raise or lower interest rates. They are one of the tools that the Fed has at its disposal to boost or slow down the country’s economic activity.

Detailed explanation-5: -The Fed has the ability to influence the federal funds rate by changing the amount of reserves available in the funds market through open-market operations-namely, the buying or selling of government securities from the banks.