Which of the following refers to the purchase and sale of government securities?
Show answer & explanation
Correct answer: B
Explanation
The correct answer is option 2 i.e. Open market operations.
The purchase and sale of government securities by a central bank is called Open Market Operations (OMOs). OMOs are a key tool used by central banks to regulate the money supply and control inflation.
Explanation
- OMOs are a monetary policy tool used by central banks like the Reserve Bank of India (RBI) and the Federal Reserve.
- The goal of OMOs is to regulate the money supply and control inflation.
- Buying securities injects liquidity into the banking system, which can lower interest rates and stimulate economic activity.
- Selling securities withdraws liquidity from the market, which can raise interest rates and curb inflation.
- OMOs are a medium-term tool because it takes a few weeks to see their impact on liquidity.