ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -An open market sale of government securities will cause the money supply to decrease.

Detailed explanation-2: -The correct answer is a. When the Fed wants to increase the money supply, it implements an expansionary monetary policy. This type of policy includes the decrease of the discount rate, the purchase of government securities, and the reduction of the reserve requirement ratio.

Detailed explanation-3: -The Fed may raise the amount of money banks are required to keep in reserve in order to decrease the money supply, or they may lower the requirement in order to make the banks more liquid and stimulate the economy.

Detailed explanation-4: -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-5: -If the central bank wants interest rates to be lower, it buys bonds. Buying bonds injects money into the money market, increasing the money supply. When the central bank wants interest rates to be higher, it sells off bonds, pulling money out of the money market and decreasing the money supply.