When the Fed wants to expand the money supply through open market operation, it
buys government securities from member banks
conducts the purchase of government securities, such as bonds, on the open market. By doing so, the Fed injects newly-created money into the financial system, effectively expanding the money supply.
This process, known as expansionary monetary policy, is typically used by the Fed to stimulate economic growth and prevent or alleviate a recession. By increasing the money supply, the interest rates on loans decrease, making it less expensive for businesses and consumers to borrow money. This often leads to increased spending and investment, which can promote economic growth.
However, expansionary monetary policy also carries the risk of inflation. If too much money is injected into the economy, it can lead to an excess of supply, which can devalue the currency and cause prices to rise. As such, the Fed must carefully balance the benefits of expanding the money supply with the potential risks of inflation.
More Answers:
Boosting Economic Growth: An Overview of Expansionary Fiscal Policy’s Impacts on Employment, Spending, and Interest RatesUnderstanding What is Included in GDP: Analysis of Non-Included Items such as International Sales, Retirement Benefits and Stock Transaction.
Analyzing Long-Run Economic Performance: Key Assumptions in Macroeconomics