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The Federal Reserve can increase the money supply by buying government securities from the non-bank public...

The Federal Reserve can increase the money supply by buying government securities from
the non-bank public in the secondary market. Use supply and demand analysis for
government securities to discuss the impact of the above action on the interest rate.

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Answer #1

The federal reserve changes the demand and supply of quantity of money in the system by buying and selling government securities in the secondary market hence indirectly impacting the rate of Interest. Buying and selling of government of securities one of the many methods through which federal reserve impact the Interest rate.

When the Interest rate is high and federal reserve wants to lower the Interest rate, it does buy government securities from the secondary market, infusing more liquidity in the system and since there is more supply of money in the system interest rate goes down.

When the Interest rate is low and federal reserve wants to increase the Interest rate, It does sell government securities in the secondary market and taking out the excess liquidity from the system, when the supply of money in the system is less and demand is high, it causes the Interest rate to go up.

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