ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Open market operations work by selling and buying government securities by the central bank of a nation. To increase the money supply, the central bank buys back securities, while to reduce the money supply it sells securities to the commercial banks.

Detailed explanation-2: -The Fed conducts open market operations to regulate the supply of money that is on reserve in U.S. banks. The Fed purchases Treasury securities to increase the money supply and sells them to reduce it.

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: -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-5: -By buying or selling bonds, bills, and other financial instruments in the open market, a central bank can expand or contract the amount of reserves in the banking system and can ultimately influence the country’s money supply. When the central bank sells such instruments it absorbs money from the system.