ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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increases money supply
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decreases money supply
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Either A or B
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None of the above
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Detailed explanation-1: -The three traditional tools of monetary policy 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.
Detailed explanation-2: -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-3: -Suppose the Federal Reserve increases the money supply by buying Treasury securities. What happens to the interest rate? The interest rate decreases.
Detailed explanation-4: -Consider, first, why the Fed buys bonds to boost growth and inflation. Bond-buying, or “quantitative easing” (QE), works via the so-called credit channel. That is, it encourages banks to lend more. When the Fed buys bonds from banks, their cash reserves at the Fed go up.