ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -With a tight money policy, the Federal Reserve sells bonds, raises the reserve ratio, or raises the discount rate. As a consequence of these actions, excess reserves decrease, which in turn decreases the money supply. When this happens, interest rates rise, investment spending decreases and aggregate demand decreases.

Detailed explanation-2: -KEY TAKEAWAYS In theory, tightening monetary policy makes credit more expensive, which reduces consumption and investment and-in turn-works to lower inflation as firms adjust prices.

Detailed explanation-3: -Lowering the fed funds rate has the opposite effect. It reduces short-term interest rates throughout the economy, increasing the supply of money and making it cheaper to get credit.

Detailed explanation-4: -Conversely, if the Fed wants to decrease the money supply, it sells bonds from its account, thus taking in cash and removing money from the economic system. Adjusting the federal funds rate is a heavily anticipated economic event.