ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -If the Fed wants to increase the money supply, it will buy bonds, increasing the reserves of the banks that sell them. The money supply would increase because these banks would then have more money to lend.

Detailed explanation-3: -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-4: -Open market operation (OMO) is a term that refers to the purchase and sale of securities in the open market by the Federal Reserve (Fed). The Fed conducts open market operations to regulate the supply of money that is on reserve in U.S. banks.