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Created by
bomtom 160 about 3 months ago

Explain how interest rates are decreased by governmental bond purchases

Interest rates can only be lower than inflation rates by artificial intervention. Governments push down the yields by purchasing bonds. How does this work in layman terms?

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Comments (7)
stashboxx2 0 about 3 months ago

The main tool used by the central banks is the manipulation of interest rates. This practice involves raising/lowering interest rates to slow/spur economic activity and control inflation. The other tool is Open Market Operations, which involves the Central Banks buying or selling bonds in the open market. This practice directly manipulates interest rates as a result of increase or decrease on the total supply of Money. If the CB buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the CB sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds. Therefore, OMO has a direct effect on money supply. OMO also affects interest rates because if the CB buys bonds, prices are pushed higher and interest rates decrease; if the CB sells bonds, it pushes prices down and rates increase. So, OMO has the same effect of lowering rates/increasing money sup

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abiye 0 about 2 months ago

the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds.

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Solutions (5)

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jobbyseal 5k about 3 months ago
12.93 mBCH
Accepted solution
bomtom 160 about 3 months ago
Creator

Great, thank you!

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underwar 824 about 3 months ago
12.93 mBCH
Accepted solution

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dexter 105 about 3 months ago
Declined solution
bomtom 160 about 3 months ago
Creator

Not answering to the question posed.

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huncho 101 about 3 months ago
Declined solution
bomtom 160 about 3 months ago
Creator

Not answering to the question posed.

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silva 0 about 3 months ago
Declined solution
bomtom 160 about 3 months ago
Creator

This is a copy n paste.

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