What is the effect of open market operations on availability of credit?

Dear Student,
Open market operation refers to the purchase and sales of government securities in the open market (public and commercials bank) by the Central bank.
(a) Excess Demand :
Government securities are sold by the Central bank in the open market. The central bank withdrawals additional purchasing power. There will be contraction of credit, less money will flow in the system. Purchasing power in the economy reduces. Aggregate demands falls and excess demand stand corrected.

(b) Deficient Demand :
By purchasing the government securities, the central bank injects additional purchasing power in the system which expands credit. More money supply will flow in the system, purchasing power in the economy increases. Aggregate demand rises and deficient demand is corrected.

Regards,

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