Question

If the central bank decides to buy back more assets through open market operations...

1.) will this stimulate or contract the economy?

2.) How does this affect interest rates?

3.) How do changes in interest rates affect supply/demand of interest earning assets

Answer 1

1)

If central banks buy more assets through open market operations, that will lead to higher flows into the economy leading to higher liquidity. Higher liquidity is an expansionary measure thus the economy will be stimulated

2)

As the assets are bought back by the central bank, this leads to more demand of this assets, thus leading to higher prices which in turn means lower interest rates

3)

This lead to higher demadn of interest earning assets and since the interest rates go down the supply also increses as the interest rate goes down. But the immediate reaction is higher demand