Question

Explain what types of policies a central bank can implement to reduce the interest rate. Explain the process.

When central banks buy a lot of bonds price increase supply money increase

Answer 1

National banks have two alternatives to decrease the loan cost: a focal bankpurchase of bonds or a diminishment in the required save proportion. The two arrangements result inan increment in the cash supply and a decrease in the loan cost. Purchasing and offering of securities by the national bank to control cash supply goes under OMO, which is a decent apparatus to execute the money related arrangement. At the point when monetary exercises in the country have backed off or the financing costs are too high, individuals don't have cash to contribute, national bank needs to infuse cash in the framework (process is called quantitative facilitating) to invigorate financial movement or to cut down loan fees. Lower will be the financing costs, more individuals will be pulled in towards obtaining cash and afterward contribute all over. This will support the economy.

Open market activities (OMO) allude to the purchasing and offering of government securities in the open market with a specific end goal to extend or get the measure of cash in the managing an account framework. Securities' buys infuse cash into the saving money framework and fortify development, while offers of securities do the inverse and get the economy.

The Federal Reserve (Fed) encourages this procedure and utilizations this system to alter and control the government stores rate, which is the rate at which banks obtain saves from each other. The Fed can utilize different types of OMO, yet the most widely recognized OMO is the buy and offer of government securities. Purchasing and offering government securities enables the Fed to control the supply of save adjusts held by banks, which enables the Fed to increment or reduction here and now loan fees as required.