ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Lower rates increase the money supply and boost economic activity; however, decreases in interest rates fuel inflation, and so the Fed must be careful not to lower interest rates too much for too long.

Detailed explanation-2: -Higher interest rates translate to a lower supply of money in the economy. Since the supply of money depletes, it raises borrowing costs, which makes it more expensive for consumers to hold debt.

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: -By contrast, if the Fed sells or lends treasury securities to banks, the payment it receives in exchange will reduce the money supply.

Detailed explanation-5: -The Bottom Line. Today, the Fed uses its tools to control the supply of money to help stabilize the economy. When the economy is slumping, the Fed increases the supply of money to spur growth. Conversely, when inflation is threatening, the Fed reduces the risk by shrinking the supply.