Open Market Operations - Coursework Example

The assets the bank decides to buy can either be real assets, for example, buildings, or financial assets such as bonds. It is very interesting to note that a bank losses money when a loan is repaid. The currency is destroyed and disappears from the economy entirely.   Open Market Operations are one of the primary tools that the Federal Reserve employs to accomplish its monetary policy objectives (Axelrod, n.d.). They entail the acquiring and selling of government securities. The Federal Reserve has no power to choose whom it engages in business activities.

The primary dealers operate on a price basis to gain access to the open market operations. Open Market Operations facilitate the Federal Reserve to influence the supply the reserve balances in the banking system. The effect is on short-term interest rates to spread to other monetary policy targets (Axelrod, n.d.). Open Market Operations allow central banks the flexibility to manage the volume of financial operations on their initiative. The domestic trading desk of the Federal Bank of New York under the supervision of the Federal Open Market Committee conducts open market transactions (Axelrod, n.d.).

The federal funds rate does respond to changes in demand for and supply of the reserves in the banking system. It, therefore, shows a good sign of the existence of credit in an economy.