Question

An open market purchase of government securities (such as Treasury Bills) by the Central Bank will decrease the money supply and raise the interest rate.

you can say true or false.

Answer 1

False

Open market purchase of government securities by central bank increase the money supply and decrease the interest rate.

Open market purchase of government securities by central bank increase the reserves of commercial banks because central bank purchase securities from commercial banks in exchange of cash. This raises the ability of commercial banks to lend money. In order to lend more, commercial banks decrease the interest rate so that more people can borrow money. As a result money supply increases in the economy. Therefore open market purchase of government securities by central bank increase the money supply and reduce interest rate.