Define or Explain the following concepts. 2. Open Market Operation

Define or Explain the following concepts.

2. Open Market Operation

Answer: 

2. Open Market Operations refer to the buying and selling of government securities. These securities can be bought or sold to the public or to the commercial banks in an open market. Open Market Operations are used by the Central Bank to affect the money supply in the economy. The selling of securities by the RBI wipes out the extra cash balance from the economy, thereby limiting the money supply, whereas in the case of buying securities by the RBI, additional money is pumped into the economy stimulating the money supply.

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