ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The Federal Reserve buys and sells government securities to control the money supply and interest rates. This activity is called open market operations .

Detailed explanation-2: -The Fed purchases Treasury securities to increase the money supply and sells them to reduce it. By using OMOs, the Fed can adjust the federal funds rate, which in turn influences other short-term rates, long-term rates, and foreign exchange rates.

Detailed explanation-3: -OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase.

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: -The Fed has the ability to influence the federal funds rate by changing the amount of reserves available in the funds market through open-market operations-namely, the buying or selling of government securities from the banks.