Question

How does a central bank influence credit creation by commercial banks through 'open market operations'? Explain.

Answer 1

Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities in the open market to control the supply of money in the economy. By selling the securities, the central bank soaks liquidity from the economy as in case of inflation and by buying the securities, the central bank releases liquidity in the economy as in case of deflation.