Monetary Policy

3. Open Market Operations: By far the most common form of monetary policy, open market operations involve the buying and selling of government securities (such as Treasury bonds) by the central bank on the open market.

Expansionary open market operations: When the central bank purchases government securities from commercial banks and the public, it injects money into the banking system and economy. Thus, the money supply in the economy expands, leading to lower interest rates that stimulate interest-sensitive consumer and investment spending, boosting economic activity and economic growth in another form of expansionary monetary policy.

Contractionary open market operations: When the central bank sells government securities to commercial banks and the public, it takes money out of the economy by replacing it with government bonds. This decreases the money supply in the economy, increasing interest rates and decreasing interest-sensitive consumer and investment spending. This slows down the economy, making it another form of contractionary monetary policy.