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
Explain the short-run production function with one variable input with the help of assumed figures. Clearly indicate the three stages of physical product, using table and graphs.

PHILLIPS CURVE   The Phillips  curve,  named  after  A.  W.  Phillips,  describes  the  relationship between unemployment  and  inflation. In  1958  Phillips, then  professor a

The theory of consumer's behavior seeks to explain the determination of consumer's equilibrium. Consumer's equilibrium refers to a situation when a consumer gets maximum satisfacti

Average Propensity to save The Average Propensity to Save [APS] is defined as the fraction of aggregate national income which is devoted to savings.  Thus if S denotes savin

The demand for good X is estimated to be:  where p x price of X in dollars M = personal disposable income in trillions of dollars per year P y = price of a competitive in do

a) A change in demand means that: b) On the production-possibilities drawing, unemployment is represented by:

determinants of price expectation of elasticity

Prices of other related goods i)           Substitutes:   If X and Y are substitutes, then if the price X increases, the quantity demanded of X falls.  This will lead to inc

The following contains cost and benefit information for two different alternatives for a w capital investment in computerized process technologies to control the process at a manuf