Question

Explain Open Market Operations as a measure to control inflation.

Answer 1

1. The central bank conducts open market operations by purchasing and selling government bonds and securities on the open market.
2. To keep inflation under control, the central bank sells government securities to the public through banks. This causes a portion of bank deposits to be transferred to central bank accounts, reducing commercial banks' credit creation capacity.
3. It reduces the economy's money supply and credit. As the money supply shrinks, so does aggregate demand, and inflation is brought under control.