ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Buying bonds injects money into the money market, increasing the money supply. When the central bank wants interest rates to be higher, it sells off bonds, pulling money out of the money market and decreasing 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: -By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy. Conversely, by raising the banks’ reserve requirements, the Fed is able to decrease the size of the money supply.

Detailed explanation-4: -The Fed conducts open market operations to regulate the supply of money that is on reserve in U.S. banks. The Fed purchases Treasury securities to increase the money supply and sells them to reduce it.

Detailed explanation-5: -To decrease the money supply, the Fed may sell government securities or lower taxes. The interest rate that the Fed charges when it lends reserves to banks is called the federal funds rate.