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?

Answer 1

With the objective of the overall development of the country, the Federal Open Market Committee sets monetary policy within the US, and therefore the Fed's trading desk uses open market operations to realize that policy's objectives. To increase the money supply, the Fed will purchase bonds from banks, which injects money into the banking industry.

During a recession or economic downturn, the Fed will seek to expand the availability of cash within the economy, with a goal of lowering the federal funds rate—the rate at which banks lend to each other overnight. To do this, the Fed trading desk will purchase bonds from banks and other financial institutions and deposit payment into the accounts of the buyers. This increases the quantity of cash that banks and financial institutions wear hand, and banks can use these funds to supply loans. With extra money available, banks will lower interest rates to entice consumers and businesses to borrow and invest, thereby stimulating the economy and employment.