ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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a central bank sells bond to the public
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a central bank sells bonds to commercial banks
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the central bank buys bond from commercial banks
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the board of governors increases the discount rate
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Detailed explanation-1: -The Federal Reserve can influence the Federal funds rate by buying or selling government bonds. When the Federal Reserve buys bonds, this action increases the supply of excess reserves of banks.
Detailed explanation-2: -A commercial bank’s excess reserves refer to reserves in addition to what is required by the nation’s central bank. Therefore, when a bank holds excess reserves, it has more funds to increase loans given out to borrowers. Usually, excess reserves depend on the reserve requirement.
Detailed explanation-3: -If the central bank wants interest rates to be lower, it buys bonds. 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-4: -If the Fed wants to give banks more reserves, it can reduce the interest rate it charges, thereby inducing banks to borrow more. Alternatively, it can soak up reserves by raising its rate and persuading the banks to reduce borrowing.