ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -To increase the money supply, the Fed will purchase bonds from banks, which injects money into the banking system. To decrease the money supply, the Fed will sell bonds to banks, removing capital from the banking system.

Detailed explanation-2: -Conducting Open Market Operations Conversely, if the Fed wants to decrease the money supply, it sells bonds from its account, thus taking in cash and removing money from the economic system.

Detailed explanation-3: -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-4: -When the Federal Reserve buys bonds, bond prices go up, which in turn reduces interest rates. Open market purchases increase the money supply, which makes money less valuable and reduces the interest rate in the money market.

Detailed explanation-5: -To decrease the (growth of the) money supply, the Fed could either sell bonds, raise the reserve requirement ratio, or raise the discount rate. 24.