OPEN MARKET OPERATIONS

This involves the sale and purchase of treasury
bill and bonds to public and financial
institutions.
This directly affects the reserve position of the
commercial bank. If the central bank wants to
reduce the quantity of money in circulation,
probably when money supply is too much to
raise inflation, it will sale bonds in the open
market. When the central bank sales bonds, it
collects money from the purchase .thus the
public pays for the bills by writing cheques,
which will be drawn against commercial bank
account. These reduce their reserves and the
ability to create credits.
On the other hand, if the money in circulation
is too small so as to hamper business
activities, the central bank buys the treasury
bills and bonds. The commercial bank reserves
increases and enables it to provide more credit
to the public.

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