Question

Explain the role of "open market operations" in controlling the inflationary gap.

Answer 1

Open market operation is the policy that focuses on increasing and decreasing the stock of liquidity with the people, through sale and purchase of securities by the central bank. During excess demand or inflation, the central bank tries to sell securities. Sale of securities reduces purchasing power from the market. Consequently, aggregate demand is decreased and excess demand or inflationary gap gets combated.