Posted in Finance, Accounting and Economics Terms, Total Reads: 385
Definition: Open Market Operations
Open Market Operations (OMO) is a method used by federal government to control the amount of money in the banking system. This is the activity of central government to buy and sell bonds in open market thus can use it as a tool to expand or contract the money supply in the market. Thus OMO is a principle monetary policy tool of the government. Main aim of OMO is to alter the short term interest rate and supply of money into the economy.
OMO may also be used to curb inflation. Thus whenever the inflation goes up, it indicates the increase in buying power of the consumer thus a rising money supply into the market, thus the role of government is to contract the money supply. Thus the government sells the bonds the market and takes out money from the market thus contracting the money supply. Similarly in case government wants to foster growth by pumping in money into the market, it buys back the securities from the market thus leading to increase in money supply into the economy which leads to growth of the economy.