When the Fed purchases bonds on the open market, it expands the amount of money available to the general public by exchanging the bonds for cash. In contrast, if the Fed sells bonds, it reduces the money supply because it takes money out of circulation in return for bonds.
<h3>What is money supply?</h3>
Lower interest rates are often a result of increased money supply, which leads to more investment and more money in consumers' hands, which in turn boosts consumption. In response, companies place larger orders for raw materials and boost output.
People like to hold more money while interest rates are falling than when they are rising, and vice versa. Another method for bringing the money supply and demand into balance is through price changes. When people have more nominal money than they need, they spend it more quickly, driving up prices.
When the Fed purchases bonds on the open market, it expands the amount of money available to the general public by exchanging the bonds for cash. In contrast, if the Fed sells bonds, it reduces the money supply because it takes money out of circulation in return for bonds.
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