Open market operations

The central bank’s buying and selling of government bonds on the open market from commercial banks and the public. Aimed at increasing or decreasing the level of reserves in the banking system and thereby affecting the interest rate and the level of aggregate demand. Selling bonds takes money out of circulation, reducing the supply of money and raising the interest rate (contractionary monetary policy). The Fed’s buying of bonds increases the amount of money in circulation, increasing the money supply and reducing interest rates (expansionary monetary policy).

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