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How do open market operations impact the money supply and interest rates?
Open Market Operations are the monetary tools used by central banks with the purpose of changing the money supply in the economy. Since these operations takes place in the open market for bonds , they heavily impact the interest rates and the money supply in the economy. It happens in the followingRead more
Open Market Operations are the monetary tools used by central banks with the purpose of changing the money supply in the economy. Since these operations takes place in the open market for bonds , they heavily impact the interest rates and the money supply in the economy. It happens in the following two ways:
- Expansionary Open Market Operations: In these operations , Central banks buys bonds in the bond market and pays for them by creating money , thus increasing money supply in the economy. As the central bank buys bonds , the demand for bonds goes up , increasing their price. Conversely, the interest rate on bonds goes down.
- Contractionary Open Market Operations: In these operations, Central banks sells bonds in the bonds market, thereby decreasing money supply in the economy . This leads to a decrease in the prices of bonds and increase in the interest rate.
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