How do the Federal Reserve's open market operations work to affect the economy?

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pohnpei397 eNotes educator| Certified Educator

Open market operations work by affecting the supply of money that is available in the United States.  This is one of the most important ways in which the Federal Reserve (the Fed) can carry out monetary policy. 

Open market operations are the process in which the Fed buys and sells government securities.  By doing so, it can inject money into the economy or it can take money out of the economy.  When the economy is growing relatively slowly (as it is now) or when it is not growing at all, the Fed wants to inject money.  If there is more money in the economy, there can be more lending and borrowing.  This can lead to economic growth.  That is why the Fed is currently buying large amounts of government securities.  When it buys the securities, it gives money to the banks that had owned the securities.  Thus, the banks have more money than they previously had and therefore can make more loans.  If the Fed were concerned about inflation, it could do the opposite; it could sell securities, thus taking money away from the banks.

Open market operations work, then, by affecting the amount of money that is in the economy.