ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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central bank buys or sells stocks
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central bank buys or sells government bonds
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central bank increases or decreases the discount rate to monitor the money supply
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central bank increases or decreases reserve requirements for depository institutions
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commercial banks borrow reserves from the central bank
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Detailed explanation-1: -Open market operation (OMO) is a monetary policy by the central bank in which the bank through government deals in the sale and purchase of securities and bonds in the open market to control the supply of money in the economy.
Detailed explanation-2: -Open market operations (“OMOs”) are the central bank’s primary tool of monetary policy. If the central bank wants interest rates to be lower, it buys bonds. Buying bonds injects money into the money market, increasing the money supply.
Detailed explanation-3: -Open Market Operations If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds.
Detailed explanation-4: -open-market operation, any of the purchases and sales of government securities and sometimes commercial paper by the central banking authority for the purpose of regulating the money supply and credit conditions on a continuous basis.
Detailed explanation-5: -Thus, buying government bonds from banks increases the real GDP of the economy; hence this method is also called Expansionary Monetary policy.