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What are the advantages of Open Market Operations conducted by the Federal Reserve?

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thetall eNotes educator | Certified Educator

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Open Market Operations are among the tools available to the Federal Reserve for purposes of achieving the economy’s financial policy objectives. It works to ensure regulation of the economy by a single institution (the Fed) while limiting the influence by other institutions on the policy, thus in effect protecting the economy from the interests of these other institutions. The Federal Reserve is able to achieve this by creating money through purchasing government securities in the open markets, which increases money in the banks and in the general economy. This form of control is an advantage because it enables growth of businesses due to the low interest on loans. This also protects the people from increasing inflation. The reverse can also occur where the Federal Reserve sells the securities, and this reduces the money in the economy, which increases the interest rates. This is done especially when the Federal Reserve seeks to protect or improve the value of the money.

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The major advantage of open market operations is that they inject money directly into the economy (or they extract money directly from it).

When the Fed conducts open market operations, it wants to be able to have an impact on the money supply.  When it does open market operations, it gets to affect the money supply directly.  It does not have to rely on people to borrow money (as with interest rates).  The Fed simply injects money into the economy by buying securities or extracts it by selling them.  This means open market operations can have a direct impact.  One other advantage is that these operations can be done on a daily basis and can therefore be used to make fine calibrations to the money supply where interest rate changes cannot be.

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