Question

Choose the best response for each of the following statements. a. When the Federal Reserve makes an open market purchase, the Fed: buys bonds from the public, which decreases the money supply. sells bonds to the public, which decreases the money supply. sells bonds to the public, which increases the money supply. buys bonds from the public, which increases the money supply. b. If the Fed wants to increase interest rates, it should make an . This would the money supply and achieve the increase in interest rates.

Answer 1

Answer:

A) buys bonds from the public, which increases the money supply.

B) it should sell bonds, this would decrease money supply & achieve increase in interest rates

Explanation:

Open Market Operations [OMO] refers to purchase & sale of government securities (bonds) in open market.

• To increase money supply in Economy : Federal reserve purchase government securities in OMO, implies that cash liquidity against this purchase increases in hands of public. This increased liquid cash with public increase money supply in the economy.
• To increase interest rate in Economy: Federal markets sale of government securities in OMO, implies that cash liquidity against this sale decreases in hands of public. This decreased liquid cash, money supply leads to increase in interest rates.