Question

Explain how the Federal Open Market Committee’s decisions affect consumers.

Answer 1

Federal open market committee works in US economy through open market operations. They can sell or purchase government bonds in the market through open market operations.

Case of selling bonds: When committe sell bonds in the market, they absorb cash currency from the market in exchange of bonds from the public. It reduces the money supply in the market and works as contractionary monetary policy which raises the rate of interest by shifting LM curve to its left.

Case of buying bonds: If committee buys bonds from the market, they release money in the market which raises the overall money supply. It works as an expansionary monetary policy shifting LM curve to its right which will reduce the rate of interest in an economy.

As open market operations directly effect the rate of interest, consumers consumption decision changes with it. They tries to save more when rate of interest is high and invest more when rate of interest is low.