ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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to reduce the price level when concerned about inflation
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to increase the price level when concerned about a recession
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to increase the money supply when concerned about a recession
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to reduce the money supply when concerned about inflation
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Detailed explanation-1: -Key Takeaways. The Federal Reserve buys and sells government securities to control the money supply and interest rates. This activity is called open market operations.
Detailed explanation-2: -When the Fed buys securities on the open market, cash is transferred to these banks, increasing the nation’s money supply. Conversely, when the Fed sells government securities, these banks have less cash available to them – a decrease in the nation’s money supply.
Detailed explanation-3: -When the Fed wants to decrease the money supply, it sells securities. That transaction deducts the purchase amount from the bank’s reserve (or the dealer’s account). This reduces the amount of money the bank has to lend in the federal funds market and increases the federal funds rate.
Detailed explanation-4: -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.