Open Market Operations
Definition
Open market operations refer to the buying and selling of government securities by the central bank in order to control the money supply and interest rates.
Analogy
Imagine you are a DJ at a party. You have control over the music volume, so when you want to get people dancing, you increase the volume by playing more energetic songs. Similarly, when the central bank wants to stimulate economic activity, they buy government securities to increase the money supply.
Related terms
Discount Rates: The discount rate is the interest rate charged by the central bank on loans provided to commercial banks. It serves as a tool for controlling borrowing costs and influencing monetary policy.
Reserve Requirements: Reserve requirements are regulations that determine how much money banks must hold in reserve against their deposits. By adjusting these requirements, the central bank can influence lending capacity and overall liquidity in an economy.
Money Supply: The money supply refers to all physical currency (coins and notes) in circulation along with demand deposits held by individuals and businesses. It is an important indicator of economic activity and inflationary pressures.
"Open Market Operations" appears in:
Study guides (5)
Practice Questions (1)
- How do central banks influence interest rates through open market operations?
Resources
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