How will reverse repo rate and open market operations control excess money supply in an economy?
Dear Student,
Reverse Repo rate is the rate at which Central Bank borrows money/funds to commercial banks. Increase in Reverse Repo Rate results in that banks have to transfer more funds to Central Bank and reduces banks ability to create credit.
Open Market Operations refers to buying and selling of government securities by Central Bank from to public and commercial banks. Sale of such securities reduces the reserve of commercial banks and adversely affects bank’s ability to create credit and hence decreases the money supply in the economy.
Regards
Reverse Repo rate is the rate at which Central Bank borrows money/funds to commercial banks. Increase in Reverse Repo Rate results in that banks have to transfer more funds to Central Bank and reduces banks ability to create credit.
Open Market Operations refers to buying and selling of government securities by Central Bank from to public and commercial banks. Sale of such securities reduces the reserve of commercial banks and adversely affects bank’s ability to create credit and hence decreases the money supply in the economy.
Regards