When the Federal Reserve sells government securities on the open market, what effect does this action have on the nation's money supply and interest rates?

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Business

Alia Brock

24 January, 07:37

When the Federal Reserve sells government securities on the open market, what effect does this action have on the nation's money supply and interest rates?

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Courtney Macdonald · Answer 1

When the government sells securities, it is selling federal bonds, or debt, that it will later repay.

This has the effect of pulling money out of circulation and into the coffers of the government, instead providing the buyers of the bonds with the debt rather than the money they had. In other words, the money supply decreases when the Fed sells government securities.

Generally, interest rates go down when the Fed sells more bonds. This is because the supply of bonds increases, which means the money supply is lower and the cost of borrowing increases with it.