Question

How does the Federal Open Market Committee increase the money supply? Why might the Federal Open Market Committee choose to increase the money supply?

MUST BE AT LEAST 250 WORDS

Answer 1

Federal Open Market Committee increase the money supply through open market operations . Open market operations means buying and selling of government bonds in the market . When money supply requires to be increased the Federal Reserve starts to buy bonds from the market . When they  buys a government bond from a bank, that bank acquires money which it can lend out . So supply of loanable funds rise in the market . Hence money supply will increase in the economy . An action of purchase of bonds increase the money supply in the economy .

This is a part of expansionary monetary policy . Such a policy is implemented when an economy faces recession . The Federal Open Market Committee chooses to increase the money supply in order to boost economy during a recession . Increasing money supply causes an increase in aggregate demand , so price level rises and also the real GDP of the economy which helps to close the recessionary gap .

The opposite procudures are followed when an economy is facing high inflation .