Question

Unemployment is on the rise though inflation is quite low. Gross Domestic Product is rising but more slowly than the goal rate. The Federal Reserve may buy government securities in open market operations in order to:___________.A. increase the money supply and encourage economic growth.B. decrease the money supply and encourage people to save in difficult times.C. give consumers more money to open their own businesses.D. force the banks to stop giving out loans in an uncertain economy.

Answer 1

A) increase the money supply and encourage economic growth.

Step-by-step explanation:

The Fed's dual mandate is to "promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates" and the way it tries to comply with it is through open market operations. Open market operations involve selling and buying US securities.

When the Fed decreases the interest rate and starts to buy securities, it is engaging in an expansionary monetary policy. This means that it will increase the money supple and lower interest rates in order to try to boost the economy by increasing aggregate demand. The negative side effect of this policy is that the inflation rate will increase, so the US dollar will lose value and depreciate against other currencies.

Answer 2

A. increase the money supply and encourage economic growth.

Step-by-step explanation:

The Federal Reserve may buy government securities in open market operations in order to increase the money supply and encourage economic growth.

An increase in the supply of money works both through

1. Lowering interest rates, which spurs investment, and

2. Through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending.

3. It also increases wage rate and reduces unemployment (because the increased investment will need more workers for increased production) as unemployment increases as inflation (more money in the economy) increases.

Opposite effects occur when the supply of money falls or when its rate of growth declines.