Question

Buying of government security by RBI . How it will affect the money supply ?

Answer 1

When the Federal Reserve purchases government securities on the open market, it increases the reserves of commercial banks and allows them to increase their loans and investments; increases the price of government securities and effectively reduces their interest rates; and decreases overall interest rates, promoting business investments.

If the Federal Reserve were to sell government securities on the open market, the opposite would be true. It would decrease the reserves of commercial banks and reduce their loans and investments, decreasing the price of government securities and increasing their interest rates, and increasing overall interest rates, reducing business investments.