Question

Open market operations alter the money supply by ________ A. influencing banks' ability to make loans to indivduals and corporations B. adding currency to or withdrawing currency from banks' vaults C. adding currency to or withdrawing currency from the checking accounts of individuals and corporations D. influencing the banks' ability to make loans to the government E. none of the above

Answer 1

(a) influencing bank's ability to make loans to individuals and corporations.

Open Market Operations are conducted by central bank by means of sale and purchase of government securities to adjust money supply conditions. A central bank sells the securities to suck out the liquidity from the system and buys back in order to infuse the same. These Operations are carried out on a regular basis with an objective to control inflation and bank's ability to lend. They are used along with some other tools such as repo rate, cash reserve ratio, to control the quantum and price of money. They are imperative to maintain the liquidity. There should neither be high cash flow nor there should be a shortage of cash. In order to strike balance, central banks use OMOs.