open market operations
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11 Terms
what are open market operations (OMO)
the buying and selling of government bonds in the open market
what is the purpose of OMO
to expand/contract the amount of money in banking system
what happens when SARB buys bonds from banks
it takes money into the banking system
what happens when SARB sells bonds
it takes money out of the economy
what is the required reserve ratio
the minimum percentage of deposits that banks must hold as reserves
what happens if the reserve ratio increases
banks must hold more reserves → have less money available to lend → money supply decreases → interest rate increases
what do verticalists believe
the central bank controls the quantity of money, so the money-supply curve is vertical
what do horizontalists believe
the central bank sets the interest rate, while the money supply adjusts to meet money demand, so the money-supply curve is horizontal
what does the horizontalist view say the central bank sets
the interest rates
what does the verticalist view say the central bank sets
the quantity of money/base money