What Are The Effects Of Open Market Operations?


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Nouman Umar Profile
Nouman Umar answered
There are many effects of the open market operations.

Effect on interest rate: The open market operations affect the quantity of money supply in the economy. It also affects the market rates of interest indirectly. When the central bank purchases securities there results an increase in the money supply leading to fall in the market rates of interest and vice versa.

Open market operation policy during inflation: During inflation the central bank sells securities to the public. It receives payment by cheques drawn on commercial banks. This reduces the cash reserves of the commercial banks. The ability of the banks to create credit is also curtailed. The fall in the amount of money in circulation and the volume of credit help in bringing down general price level.

Open market policy during depression: During depression the central bank attempts to increase the volume of credit by purchasing the securities from the public that is payment is made by the central bank to the sellers through cheques. The deposits of the commercial banks increase. The credit creation capacity of the banks is increased. The increase in loans from commercial banks results in the expansion of investment, employment and output. So open market has effects on different things.

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