Question

RESPOND TO THE FOLLOWING EITHER AGREEING DISAGREEING OR ADDING ADDITIONAL KNOWLEDGE.

Open market operations or OMOs are the purchase and sale of securities in the open market by a central bank. This is one of the three main policy tools that the federal reserve uses for monetary policy. Monetary policy "refers to the actions undertaken by a central bank to influence the availability and cost of money and credit to help promote national economic goals." In the original text, it discusses how the near-zero target range for the federal funds rate has changed the way OMOs are used. The federal reserve expanded their holdings of longer-term securities in order to put downward pressure on long term interest rates. This was done to support economic activity and to foster an environment that would lead to job creation through more accommodative financial conditions.

To put the idea of open market operations into easier to understand terms you could say that the central bank is able to increase the money supply and lower market interest rates by purchasing securities using newly created money. On the other hand, the central bank can always sell securities from the balance sheet to take money out of circulation and raise interest rates. The two goals set the fed have when either selling or buying securities are thus, expansionary and contractionary. When the fed is trying to expand it wants to pour money into the banks which then pressures the banks to lend more money to consumers. This creates competition between the banks and subsequently lowers the rates. When the fed is trying to contract is does the opposite and this raises the interest rates and lowers consumer spending.  

Open market operations have long been one of the strongest tools in the box for the fed and understanding how they work will give you a better sense of the banking environment.

Answer 1

The given paragraph is correct. since capital markets have huge funds involved along with huge impact on the long term economy (Long term effect) and higher risk factor with liitle or no impact on current situation, hence the federal reserve uses Money Market Operations to increase or decrease the flow of money in market for short term duration as per market conditions to ease pressure on the government.

In a dynamic world where situations are changing rapidily Money market operations helps the governments to tackle the effect in short term which they can then reverse when the there is no more need for it. One of the most Important tool that a federal bank uses is the change in interest rates which changes the flow of cash in the market and threby either increases demand or reducing as per the situation.

But in COVID situtaions which has a deep impact on the economies of the world Money Market operations cannot be used since this pandemic will cause a longer impact on the economy, hence most of countries are using Capital Market intruments like Stilumus packages to tackle the situtaion.