ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -This is an open market operation. Purchase of government securities will lead to a rise in money supply. Q. By purchasing government securities in the open market, the central bank intends to release greater money supply in the market.

Detailed explanation-2: -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.

Detailed explanation-3: -The Fed uses open market operations to buy or sell securities to banks. When the Fed buys securities, they give banks more money to hold as reserves on their balance sheet. When the Fed sells securities, they take money from banks and reduce the money supply.

Detailed explanation-4: -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-5: -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. When the central bank sells such instruments it absorbs money from the system.