ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -By buying or selling bonds, bills, and other financial instruments in the open market, a central bank can expand or contract the amount of reserves in the banking system and can ultimately influence the country’s money supply. When the central bank sells such instruments it absorbs money from the system.

Detailed explanation-2: -OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase.

Detailed explanation-3: -The answer is A) When the fed sells bonds in the open market, interest rates rise and aggregate demand shifts to the left. When the Fed sells bonds, they are taking money out of the economy. When the money supply drops, interest rates (which are the price of money) will rise, following the law of supply.

Detailed explanation-4: -In open market operations, the Federal Reserve buys or sells securities on the open market to raise or lower interest rates. They are one of the tools that the Fed has at its disposal to boost or slow down the country’s economic activity.