ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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.

Detailed explanation-2: -The other major tool available to the Fed is open market operations (OMO), which involves the Fed buying or selling Treasury bonds in the open market. This practice is akin to directly manipulating interest rates in that OMO can increase or decrease the total supply of money and also affect interest rates.

Detailed explanation-3: -Monetary policy influences economic activity by changing the incentives for saving and investment. This channel typically affects consumption, housing investment and business investment. Lower interest rates on bank deposits reduce the incentives households have to save their money.

Detailed explanation-4: -Expansionary policy also known as loose fiscal policy increases the force of loanable finances in the economy. As a result, the interest rates drop in an economy.

Detailed explanation-5: -A larger money supply lowers market interest rates, making it less expensive for consumers to borrow. Conversely, smaller money supplies tend to raise market interest rates, making it pricier for consumers to take out a loan.