Question

Please briefly explain what the open market operations are. (hint: use “government bonds”, “Federal Reserve Banks”, and “Money Supply” in your explanation.)

Answer 1

In an open market operation, the primary aim of the Federal Reserve Bank (Fed) is to either increase or decrease the amount of money in circulation, or the money supply in the economy. This is achieved by the Fed by purchasing government securities (bonds) from the public, or selling them to the public. The former action of purchasing injects money into the economy, thereby increasing the money supply and stimulates growth, whereas the latter action of selling government bonds does the opposite of it and contracts the economy.