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Money And Banking

Question
CBSEENEC12013578
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Explain the role of the following in correcting 'excess demand' in an economy: 
Open market operations

Solution

Open Market operations as an Instrument to Correct Excess Demand:
Open Market Operations refer to the buying and selling of securities either to the public or to the commercial banks in an open market. To curtail excess demand the central bank sells securities in the open market. By selling the securities in the open market, the central bank withdraws excess money from the economy. This results in a lower Aggregate Demand in the economy and excess demand is controlled.

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