Open market operations, Managerial Economics

Assignment Help:

Open Market Operations

The Central Bank holds government securities.  It can sell some of these, or buy more, on the open market, buying or selling through a stock exchange or money market.  When the bank sells securities to be bought by members of the public, the buyers will pay by writing cheques on their accounts with commercial banks.  This means a cash drain for these banks to the central bank, represented by  a fall in the item "bankers" deposits' at the central bank, which forms part of the commercial banks' reserve assets.  Since the banks maintain a fixed liquidity (or cash) ratio, the loss of these reserves will bring about multiple contraction of bank loans and deposits.

By going into the market as a buyer of securities, the central bank can reverse the process, increasing the liquidity of commercial banks, causing them to expand bank credit, always assuming a ready supply of credit-worthy borrowers.

Conversely, if the central bank wanted to pursue an expansionary monetary policy by making more credit available to the public, it would buy bonds from the public.  It would pay sellers by cheques drawn on itself, the sellers would then deposit these with commercial banks, who would deposit them again with the central bank.  This increase in cash and reserve assets would permit them to carry out a multiple expansion of bank deposits, increasing advances and the money supply together.


Related Discussions:- Open market operations

Decision making, Explain how managerial economics is useful for decision ma...

Explain how managerial economics is useful for decision making

Eco, distinguish between industry demand and firm company demand

distinguish between industry demand and firm company demand

Proportional tax, PROPORTIONAL TAX Is where whatever the size of incom...

PROPORTIONAL TAX Is where whatever the size of income, the same rate or same percentage is charged.  Examples are commodity taxes like customs, excise duties and sales tax.

Price elasticity and marginal revenue, The most significant uses of the pri...

The most significant uses of the price elasticity of demand, used specifically in business decision-making. It refer to the relationship between price elasticity and the marginal c

What are the forecasting techniques, Write the forecasting techniques ...

Write the forecasting techniques There are many forecasting techniques available to person assisting the business in planning its sales. Take for instance a forecasting metho

Short run output and price, SHORT RUN OUTPUT AND PRICE In monopolistic...

SHORT RUN OUTPUT AND PRICE In monopolistic competition, it's the product differentiation that permits its price without losing sales.  Due to brand loyalty consumers will c

Demand forecast and sales forecast, Because of the complex and dynamic natu...

Because of the complex and dynamic nature of marketing phenomenon, demand forecasting has become a regular and significant business exercise. It is necessary for profit maximisatio

Barriers to entry in pure oligopoly, Barriers to entry in pure oligopoly ...

Barriers to entry in pure oligopoly The barriers to entry can be artificial or natural. Artificial Barriers This can be acquired through: State protection throu

Factors influencing supply curve - prices of related goods, Prices of other...

Prices of other related goods i)           Substitutes:   If X and Y are substitutes, then if the price X increases, the quantity demanded of X falls.  This will lead to inc

Real rigidities in the goods market, Real Rigidities in the Goods Market  ...

Real Rigidities in the Goods Market   The most important factor associated with real rigidity in  the goods market  is the existence of  imperfect  competition.  Imperfect comp

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd