ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When the central bank wants to reduce the market’s money supply, it sells securities on the open market. The intention is to raise interest rates. This approach is also known as contractionary monetary policy. Similarly, when the central bank wants to increase the amount of money on the market, it will buy securities.

Detailed explanation-2: -Central banks conduct monetary policy by adjusting the supply of money, usually through buying or selling securities in the open market. Open market operations affect short-term interest rates, which in turn influence longer-term rates and economic activity.

Detailed explanation-3: -By buying or selling bonds, bills, and other financial instruments in the open market, a central bank can expand or contract the amount of reserves in the banking system and can ultimately influence the country’s money supply. When the central bank sells such instruments it absorbs money from the system.

Detailed explanation-4: -Some of the disadvantages of open market operations are: There is a lack of a well-developed securities market for this instrument to work successfully and on a larger scale. A significant limitation of this tool is restricted dealings, as most countries’ central banks are not well prepared to handle losses.

Detailed explanation-5: -The correct answer is option D. purchases or by lowering the discount rate. The Fed can increase or decrease the money supply by conducting open market operations. The Fed can increase the money supply by purchasing government securities in exchange for money.