Question

Explain how the Fed injecting money into the economy can bring on the liquidity effect How does it increase and or decrease interest rates?

Answer 1

The Federal Reserve, charged with regulating the nation's economy during a recession, adds money to the system to make credit more readily available. As businesses and individuals borrow to finance purchases and operations, easy credit results in greater economic activity. That in economics is called the effect of liquidity.

The Federal Reserve adds money to the system through its open market operations involving U.S. purchases from the open market. Treasury securities, such as bills, notes, bonds, etc. The Fed also injects money by making U.S.-secured repurchase agreements, which are overnight or short-term interest bearing money deposits at banks and brokerage firms. Securities from the trusts. This maintains liquidity on the capital market of government by assisting banks and brokerage house bond trading desks to carry bond inventory for their trading activities. When the system contains a lot of money, interest rates go down.

When interest rates fall, bond prices rise, yielding a profit to bondholders. When a bondholder sells his bonds to realize the profit created by rising bond prices, the proceeds from that sale go into the monetary system as money in circulation or money in banks and brokerage firms ' accounts. This increases the amount of money in the system and works to lower interest rates even further.
Low interest rates also attract business and personal borrowing, because it is less expensive to borrow money. Businesses borrow to finance new equipment and plants, new hires, and expanded inventories.

When the Fed pursues a tight monetary policy, selling Treasury securities and raising the reserve requirement at banks takes money out of the system. This raises interest rates because credit demand is so high that lenders have higher prices for their loans to take advantage of the demand. Close money and high interest rates tend to slow down economic activity and may cause a recession. Discontinue employees and consumers cut back on their spending during periods of tight money companies. House prices are also falling, as fewer people can afford the boom time prices. So, low liquidity has the opposite effect of high liquidity on the economy.