ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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An increase in the interest rates charged on credit card balances
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A disruption in global oil supply
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An open-market purchase of government bonds by the central bank
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A reduction of pay and benefits for government employees
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A decrease in the wealth of households
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Detailed explanation-1: -Steps of Open Market Operations When the central bank buys government bonds, it increases the money supply in the economy. The increased money supply decreases interest rates that cause consumption and investment spending to grow, and hence the aggregate demand rises.
Detailed explanation-2: -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-3: -Which of the following will happen if the central bank of a nation purchases government bonds on the open market? The monetary base will increase and the money supply will increase.
Detailed explanation-4: -It is an activity to either increase or decreases liquidity in the banking system and influence the short-term interest rates. When the Fed makes an open market purchase, it expands the amount of money in circulation and the reserves in banks.