5) If the central banks buys government bonds from the financial system, how does that affect the interest rates, and what does that mean about the money supply, why, explain briefly?

If the Central bank buys government bonds from the financial systems, it increases the amount of reserves in the banks, which increases the amount of money that banks can lend out as loans. The increase in loanable funds will cause a downward pressure on interest rates to encourage more borrowing, which will increase money supply in the economy.

Explanation

The government controls money supply through three tools of the monetary policy: the open market operations that involve buying and selling of government bonds, federal funds rate, and the reserve requirements ratio. The central bank can encourage economic growth by raising money supply. This happens when the central bank buys government bonds from the financial system, increasing reserves that can be lend out as loans. More loanable funds means less interest rates, which translates to increase in money supply.