Question

(In Macroeconomics) What's the difference between open-market operations and normal monetary policy? Thanks.

Answer 1

Open market operations is one of the tools of the monetary policy (one of the tools to implement it). Under this, there is buying and selling of government's bonds and securities in the open market. This is done to vary the supply of money in the economy. Through OMO central bank controls the supply of reserve balances held by banks through which central bank can vary short term interest rates.

Buying of government securities and bonds leads to increase or expansion in the money supply in the economy while selling of government bonds and securities leads to decrease or contraction of money supply in the economy.

Monetary policy is rather a broad term. It is one of the most important tool to control the economic fluctuations and stabilize the economy. Its main role is to control inflation, unemployment , liquidity and growth rate at the time of economic fluctuations or crises. It is done by altering money supply and interest rates in the economy.

Monetary policy is implemented in many ways, one way is to alter the interest rates (which is the cost of borrowing), another way is to change the reserve requirement (amount that is help by banks as reserves), another is through open market operations and by altering federal funds rate.