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On March 15, 2020, in response to the coronavirus outbreak, the Federal Open Market Committee directed...

On March 15, 2020, in response to the coronavirus outbreak, the Federal Open Market Committee directed the New York branch of the bank to purchase government securities (bonds) from commercial banks.

What impact will this have on the interest rate and on the money supply?

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Answer #1

As the newyork branch of the bank is purchasing government securities.

Purchase of government securities mean infusing money into the market

It will infuse liquidity into the market ( more money for commercial banks to lend out), which leads to an increase in money supply.

As money supply increases, the Ms curve to the right causing a reduction in interest rate.

As seen from the graph as Ms shifts to the right, the interest rate reduces from r1 to r2.

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