Question

What are open market operations of a Central Bank?

Answer 1

1. The open market operations mean the sale and purchase of securities by the central bank in the open market.
2. When the central bank wants to reduce the volume of credit, it sells securities in the market.
3. The sale of securities props up the cash reserves of commercial banks towards the central bank. Similarly, when the central bank wants to expand credit, it buys securities in the open market.
4. This increases the money supply in the banking system. Compared with bank rate policy, open market operations are a more direct and effective method of credit control.