Open market operations, Managerial Economics

Open Market Operations

The Central Bank holds government securities.  It can sell some of these, or buy more, on the open market, buying or selling through a stock exchange or money market.  When the bank sells securities to be bought by members of the public, the buyers will pay by writing cheques on their accounts with commercial banks.  This means a cash drain for these banks to the central bank, represented by  a fall in the item "bankers" deposits' at the central bank, which forms part of the commercial banks' reserve assets.  Since the banks maintain a fixed liquidity (or cash) ratio, the loss of these reserves will bring about multiple contraction of bank loans and deposits.

By going into the market as a buyer of securities, the central bank can reverse the process, increasing the liquidity of commercial banks, causing them to expand bank credit, always assuming a ready supply of credit-worthy borrowers.

Conversely, if the central bank wanted to pursue an expansionary monetary policy by making more credit available to the public, it would buy bonds from the public.  It would pay sellers by cheques drawn on itself, the sellers would then deposit these with commercial banks, who would deposit them again with the central bank.  This increase in cash and reserve assets would permit them to carry out a multiple expansion of bank deposits, increasing advances and the money supply together.

Posted Date: 11/29/2012 4:49:44 AM | Location : United States







Related Discussions:- Open market operations, Assignment Help, Ask Question on Open market operations, Get Answer, Expert's Help, Open market operations Discussions

Write discussion on Open market operations
Your posts are moderated
Related Questions
Quality and Quantity Controls: Demand forecasting is a necessary and valuable instrument in the control of management of an organisation to provide finished goods of correct quant

Equilibrium Income In this model, aggregate desired expenditure has three components:  Consumption, Investment and Government Expenditure:

Illustrate the application of economic theory to some business problems

Fixed costs are those that are independent of output. They should be paid even if firm produces no output. They wouldn't change even if output changes. They remain fixed whether ou

Q. Define the Natural Monopoly? Natural Monopoly: Natural monopoly is because of natural factors. For illustration, a particular raw material is concentrated at a specific pl

Determine The scope of managerial economics The scope of managerial economics involves following subjects: 1.  Theory of demand 2.  Theory of production 3.  Theory of


Firm and industry supply schedules The plan or table of possible quantities that will be offered for sale at different prices by individual firms for a commodity is called su

The war on drugs is an expensive battle, as a great deal of resources go into catching those who buy or sell illegal drugs on the black market, prosecuting them in court, and housi

Explain the theory of production, Managerial Economics Explain the Theory of Production