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If the US government wants to increase the money supply: a. What does it do regarding...

If the US government wants to increase the money supply:

a. What does it do regarding US Treasury Bonds and explain how it helps

b. What happens to interest rates and why?

Solutions

Expert Solution

a)If the US government wants to increase the money supply,they will buy back the US Treasury bonds or purchase other financial instruments from the public or companies in order to increase liquidity in the market. By exercising buy back of US Treasury bonds and purchase of other instruments government regulates money supply in the economy.

b. To increase the money supply government will try to decrease interest rate through monetary policy.For increasing the credit or money supply, government will decrease the interest rate so that people will start taking loans from banks or other institutions at reasonable rates and start their near future project immediately.

Secondly due to low interest rate people will Investment in financial markets (buy stocks) rather than keeping those money in bank accounts and earn low returns.

In this way government controlled and expand liquidity in the economy.

jeff jeffy answered 5 months ago
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