ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds.

Detailed explanation-2: -How Do Open Market Operations Affect the Federal Funds Rate? As part of open market operations, when the Fed buys securities from banks, it increases the money supply and the banks’ reserves, which results in a reduction in the fed funds rate.

Detailed explanation-3: -The Fed sells bonds, which decreases the supply of federal funds, which raises the interest rate, which leads to a decrease in intended investment spending, aggregate demand and output.

Detailed explanation-4: -When the Federal Reserve sells government securities on the open market, what effect does this action have on the nations supply and interest rates? actions by the Federal Reserve System to expand or contract the money supply. The amount of money circulating in the economy would decrease.

Detailed explanation-5: -When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation’s money supply and expands the economy.