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 refer to the buying and selling of government securities by the central bank. These government securities typically include treasury bonds, treasury bills, and government bonds.
The central bank conducts open market operations as a tool to implement monetary policy and influence economic conditions. When the central bank wants to increase the money supply and stimulate economic activity, it buys government securities from banks and other financial institutions. By purchasing these securities, the central bank injects money into the economy, effectively increasing the supply of money available for lending and spending.
Open market operations are an important mechanism for central banks to regulate interest rates and manage the money supply. By buying or selling government securities, the central bank influences the liquidity in the banking system, impacting borrowing costs, investment levels, and overall economic conditions.
