ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Open market operations are one of three tools used by the Fed to affect the availability of money and credit. The term refers to a central bank buying or selling securities in the open market to influence the money supply.

Detailed explanation-2: -The Federal Reserve buys and sells government securities to control the money supply and interest rates. This activity is called open market operations.

Detailed explanation-3: -When the Fed buys securities on the open market, cash is transferred to these banks, increasing the nation’s money supply. Conversely, when the Fed sells government securities, these banks have less cash available to them – a decrease in the nation’s money supply.

Detailed explanation-4: -When the Federal Reserve buys bonds, bond prices go up, which in turn reduces interest rates. Open market purchases increase the money supply, which makes money less valuable and reduces the interest rate in the money market. OMOs involve the purchase or sale of securities, typically government bonds.

Detailed explanation-5: -The Fed can influence the money supply by modifying reserve requirements, which generally refers to the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy.