Answer to Question #111479 in Macroeconomics for Petronell

Question

Mention one of the instruments of monetary policy and describe how the SARB will manipulate it?

Answer 1

Open market operation is one of the instruments of monetary policy that the government uses to regulate the amount of money circulation in the economy. Central banks buy or sell securities to the country's private banks. When the central bank buys securities, it adds cash to the banks' reserves. That gives them more money to lend. When the central bank sells the securities, it places them on the banks' balance sheets and reduces its cash holdings. The bank now has less to lend. A central bank buys securities when it wants expansionary monetary policy. It sells them when it executes contractionary.