Question : Open market operations refer to the:
Option 1: Buying and selling of government securities by the central bank
Option 2: Buying and selling of goods and services in the international market
Option 3: Buying and selling of stocks and bonds in the financial market
Option 4: Buying and selling of foreign currencies in the foreign exchange market
Correct Answer:
Buying and selling of government securities by the central bank
Solution : The correct answer is (a) Buying and selling of government securities by the central bank.
Open market operations are one of the primary tools used by central banks to implement monetary policy. In this process, the central bank buys or sells government securities, such as treasury bills, bonds, or notes, on the open market.
When the central bank wants to increase the money supply and stimulate economic activity, it buys government securities from commercial banks and other financial institutions. This injects money into the banking system, providing banks with additional reserves to lend out and increase credit availability.
Conversely, when the central bank wants to reduce the money supply and control inflationary pressures, it sells government securities to commercial banks and financial institutions. This drains money from the banking system, reducing the amount of funds available for lending and credit creation.
