Economic Problem-Please Help?

Question

If the fed wanted to increase the supply of money in the economy, would the fed buy or sell securities in the open market and what would be the first effect of this policy.

Help Please

Thank you

Answer 1

Buy - by buying securities FED pays money for it to public (or security-holding private financial institutions), thus increasing money supply.

Answer 2

The Fed buys securities when it wants to increase the money supply.  When the Fed buys securities on the open market it takes billions of dollars out of the economy and holds on to it thereby curbing the effects of inflation and making money more "valuable."  The first effect would be the announcement by the Fed that it is going to buy securities on the open market, signaling investors of potential changes in interest rates.  It takes many months for monetary policy changes to actually be felt in a sophisticated economy.