Question

Define money market? How can a central bank ease conditions in the money market by
using policy interest rate?

Answer 1

Money market refers to section financial market in which trading is done of financial instruments having liquidity at a high rate and short term maturity is done.

When in the market quantity of money is Required to be increased , then central bank purchase government securities from institutions and other commercial banks. Central banks do this in order to spend a part of Expansionary or for easing monetary policies which results in lowering down of interest rates. Even when banks borrow loans from central banks at lower interest And this results in increase in borrowing which leads to increase in money circulation in the market