ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -True. The Central Bank buys government securities with an aim to increase the money supply. Purchase of securities by the Central Bank leaves more money with the people. It also increases liquidity of the commercial banks to create more credit (in terms of demand deposits).

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: -If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds.

Detailed explanation-4: -Conducting monetary policy 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-5: -An increase in the money supply will: lower interest rates and increase the equilibrium GDP.