Th2.6: Other Methods Flashcards
Open market operations
in order to reduce monetary supply, the central bank can sell more government securities on the open market
What are securities?
a promise by the government to pay a certain amount of money to the owner at a certain time and they are bought for less than their actual value - their price is determined by the demand for them
What happens when people buy securities and what does this mean?
they pay for them with money drawn from banks and so there is a fall in the bank balances, meaning banks need to reduce their lending so monetary supply will fall
What can the central bank do if they want to increase monetary supply?
buy government securities
What can the central Bank forces banks to do and what does this lead to?
hold certain assets as a percentage of their total assets (known as monetary base) meaning they can control the amount of money that is loaned out and therefore the money supply
Moreover, the central bank can restrict a bank’s ability to…
lend money or who they are allowed to lend it to
