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Provide details about a central bank’s open market operations. Why are open market operations more advantageous...

Provide details about a central bank’s open market operations. Why are open market operations more advantageous than other tools of monetary policy

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Expert Solution

Open market operations (OMO)

  • The act of buying-selling of short term securities in the open market by the central bank is called Open market operations (OMO).
  • These OMOs are done with an aim to control the money supply in the market. They further affect the interest rates in the short run.
  • The central bank increases money supply in the market by buying securities. This further helps in reduction of interest rates making it easier to procure loan.
  • Similarly, these securities are sold as a contractionary measure to reduce money supply and thus pushing interest rate upwards making loans expensive.
  • Therefore, OMOs help the central bank regulate interest rates.

OMOs are better than other tools of monetary policy as they are easier to implement due to being under direct control of the central bank. They are therefore flexible and inexpensive to implement on ground as opposed to other monetary policies which might turn out to be expensive in execution. Moreover they infuse money supply directly into the economy.

The central bank can assess the impact of OMO operations much more easily. Lastly, the OMOs do not affect the other financial institutions in the economy adversely. For example, by changing the reserve ratio, the financial institutions like banks get affected directly.


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