Question

When the government rebuys its securities, what does it do to credit and the market?

1) Loosens credit by injecting cash into the market
2) Tightens credit by withdrawing cash from the market
3) Has no effect on credit or the market
4) Cannot be determined

Answer 1

When the government repurchases its securities, it loosens credit by injecting cash into the market, increasing the money supply and possibly lowering interest rates.

Step-by-step explanation:

When the government rebuys its securities, it loosens credit by injecting cash into the market. This is because the purchase of bonds by the central bank results in money flowing from the central bank to individual banks, thus increasing the money supply in circulation. As the Federal Reserve Bank purchases assets off banks' balance sheets, it not only injects money into the banking system but also increases the amounts of funds available to lend to both the business sector and consumers. Furthermore, these actions often lead to a drop in short-term interest rates. This in turn can devalue the U.S. dollar in the global market, making exports more competitive.