ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -During periods of economic boom, money supply tends to grow quickly as commercial banks make more loans. Recessions, on the other hand, tend to be preceded by slowing rates of money supply growth. However, money supply growth tends to begin growing again before the onset of recession.

Detailed explanation-2: -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-3: -Monetary policy attempts to increase aggregate demand during recession by increasing the growth of the money supply. The theory of liquidity preference suggests that increasing the money supply will cause interest rates to fall. Lower interest rates cause higher investment spending which increases aggregate demand.

Detailed explanation-4: -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.