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Which economic effect does a central bank hope to achieve by buying back large amounts of treasury security

Sagot :

diegoapparicio1999

A. It hopes to reduce the amount of money available for lending.

Explanation:

Usually, the central bank(Federal reserve) control the supply of money in circulation in the economy so that the nation's economy would be healthy. One of the ways through which the federal reserve controls the quantity of money in circulation is by selling or purchasing of government securities through a process known as open market operation.

If the federal reserve sells government securities such as treasury bills, in large quantities, its aim is to reduce the amount or quantity of money available to commercial banks for lending, hence mop up the quantity of money in circulation.

Also, if the federal reserve buys government securities, its aim is to make more money available in large quantities to commercial banks and other institutions, hence have more cash to lend people.

ayfat23

The economic effect that central bank are trying to effect by the process of buying back large amounts of treasury security is bring reduction to amount of money available for lending.

  • Treasury notes as well as bonds are securities that brings about payment of fixed rate of interest which is usually done every six months till the  security reach a stage of maturity.

  • The central bank do buy large amounts of treasury security so that the money that can be available for lending can be reduced.

Therefore, this process are put in place to balance the economy.

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