What are open market operations?

Open market operations refer to the actions of a country's central bank, such as the Federal Reserve in the United States, in buying and selling government securities. This practice is a key tool for implementing monetary policy. When the Federal Reserve buys securities, it injects liquidity into the banking system, effectively increasing the money supply. Conversely, when it sells securities, it withdraws liquidity from the banking system, thus decreasing the money supply.

This mechanism is vital for influencing interest rates and overall economic activity. By adjusting the money supply through open market operations, the Federal Reserve can help stabilize prices, promote maximum employment, and support stable long-term interest rates. Understanding this concept is crucial for grasping how central banks influence the economy through changes in monetary policy.