ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Conducting monetary policy If the Fed, for example, buys or borrows Treasury bills from commercial banks, the central bank will add cash to the accounts, called reserves, that banks are required keep with it. That expands the money supply.

Detailed explanation-2: -Today, the Fed uses its tools to control the supply of money to help stabilize the economy. When the economy is slumping, the Fed increases the supply of money to spur growth. Conversely, when inflation is threatening, the Fed reduces the risk by shrinking the supply.

Detailed explanation-3: -An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending.

Detailed explanation-4: -Open market operations are used by the Federal Reserve to move the federal funds rate and influence other interest rates. It does this to stimulate or slow down the economy. The Fed can increase the money supply and lower the fed funds rate by purchasing, usually, Treasury securities.