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

Marginal revenue, Marginal Revenue Marginal revenue is the additional r...

Marginal Revenue Marginal revenue is the additional revenue an organization receives resulting from the sale of one more item of output. Marginal revenue is calculated by takin

Briefly explain the importance of forecasting for managers, Question: i...

Question: i) Briefly explain the importance of forecasting for managers? ii) To what extent will managers rely on surveys in business forecasting? iii) What do you mea

Effect on a consumer''s equilibrium, Problem: (a) Explain with the help...

Problem: (a) Explain with the help of a diagram, the effect on a consumer's equilibrium, of an increase in the price of commodity X while the consumer's money income and price

Contracting and insider-outsider models of unemployment, CONTRACTING AND IN...

CONTRACTING AND INSIDER-OUTSIDER MODELS OF UNEMPLOYMENT   From  the  Walrasian  assumption  of  a market-clearing wage  on  efficiency considerations  -  it was  postulated  th

Define national income, National Income National Income is a measure o...

National Income National Income is a measure of the money value of goods and services becoming available to a nation from economic activities. It can also be defined as the to

Income and substitution effects of price change, Income and Substitution Ef...

Income and Substitution Effects of Price Change When the price of a commodity falls the consumer's equilibrium changes.  The consumer can purchase the same quantity of X and Y

Theory of demand of managerial economics, Theory of Demand of managerial ec...

Theory of Demand of managerial economics According to Siegelman andSpencer "A business firm is an economic organisation that transforms productivity sources into goods which

Efficiency-wage theories of unemployment, EFFICIENCY-WAGE THEORIES OF UNEMP...

EFFICIENCY-WAGE THEORIES OF UNEMPLOYMENT   Efficiency wage  theories are clearly non-Walrasian theories in as much as they postulate  payment of  wages that  are  higher than m

Demand, explain the law of demand

explain the law of demand

Search theories - a brief'' historical overview, SEARCH THEORIES  -  A BR...

SEARCH THEORIES  -  A BRIEF' HISTORICAL OVERVIEW   A search theory of unemployment is found even in the writings of A. C. Pigou in  the inter-war  period. To explain the  high

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