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Suppose the Fed decides to increase the money supply through open market purchases, what will happen...

Suppose the Fed decides to increase the money supply through open market purchases, what will happen to the nominal interest rate (i)? Does this result contradict the goal of open market purchases in counteracting a recession? If so, why?

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Answer #1

When the money supply will be increased I the market through buying the securities, it will facilitate greater funds to the banks to lend the common man. As there will be greater funds for lending, the rate of interest rate will come down or decrease.

No this does not oppose the goal of open market purchases in counteracting a recession, as during recession government wants to improve the money supply in the market through expansionary monetary policy by buying securities, lowering the reserve rate and facilitating more money to borrow so that investment and consumption can be improved

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