Open Market Operations – how and why they are conducted Ali Almuhannadi Institution Abstract Open Market Operation (OMO) is a tool in monetary policy used by many governments through their central banks so as to influence the country’s economic situations…
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During inflationary periods, there is a lot of money supply in the economy and the government needs to take drastic measures to control the money supply before the rate of inflation worsens. The securities are offered at a higher interest rate than those of private institutions which attract most investors to acquire them and relevant deductions are then made from their bank’s reserves/ accounts. This reduces the money supply in the economy as the amount of money available for consumption to the members will reduce and so will the amount of money available in commercial banks reserves for lending which means that even the lending rate will increase. When the money supply in an economy is limited, the government may decide to increase the supply by buying back part or most of its securities from the public. The government buys them back at the rates agreed during time of sale to the investor. This means that some money will be deposited in the respective investors’ accounts which will increase their disposable incomes and subsequently their spending. This will also increase the cash reserves of commercial banks hence they can lend money to the general public at lower rates. Open Market Operations – how and why they are conducted Marketing is something which must be performed in the right way possible in order to promote increased sale of a product. This should incorporate all components of a marketing plan and functions in addition. The marketing plan in that manner becomes the central application, which has the competency to improve the sales of a product in the global perspective. The marketing of a product largely relies on the marketing plan established in any given organization. Open markets operations are the principle tool of U.S monetary policy in which central banks buy and sell bonds and securities. The principle has been in use for several years and it functions to maintain reserve balances. It is worth noting that the United States employs open market operations through the Federal Reserve Bank. There are several activities, which are conducted by the Federal Reserve Bank in order to make such operations worth running. However, this is a paper that critically explores open markets operations in terms of how and why they are conducted. It is worth noting that a critical review of the area under discussion is performed from a broad point of view. The Federal Reserve System was established in 1913 when the congress passed the Federal Reserve act. Although it is independent of the government, it is accountable to the congress because the congress can amend the Federal Reserve act when necessary. The Fed is called a "decentralized" central bank. By manipulating reserve balances the Federal Reserve can control the price of reserves in the market. The theory of open markets operations is quite simple; the fed buys securities when it wants to increase the flow of money and credit, and sells securities when it wants to reduce the flow of money and credit (Harvey 4). What they designate as their target interest rate speaks for what they are trying to fight. If they lower the interest rate they are fighting recession. If they raise the interest rate they are fighting inflation. The fed can choose from among many financial instruments to conduct open market operations: corporate bonds, corporate stocks, commercial paper, etc. it uses treasury
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