Process
Since most money now exists in the form of electronic records rather than in the form of paper, open market operations are conducted simply by electronically increasing or decreasing (crediting or debiting) the amount of base money that a bank has in its reserve account at the central bank. Thus, the process does not literally require new currency. However, this will increase the central bank's requirement to print currency when the member bank demands banknotes, in exchange for a decrease in its electronic balance.
When there is an increased demand for base money, the central bank must act if it wishes to maintain the short-term interest rate. It does this by increasing the supply of base money. The central bank goes to the open market to buy a financial asset, such as government bonds, foreign currency, gold, or seemingly nonvolatile (until the 2008 financial fallout) MBS's (Mortgage Backed Securities). To pay for these assets, bank reserves in the form of new base money (for example newly printed cash) are transferred to the seller's bank and the seller's account is credited. Thus, the total amount of base money in the economy is increased. Conversely, if the central bank sells these assets in the open market, the amount of base money held by the buyer's bank is decreased, effectively destroying base money.
Read more about this topic: Open Market Operation
Famous quotes containing the word process:
“A man had better starve at once than lose his innocence in the process of getting his bread.”
—Henry David Thoreau (1817–1862)
“The invention of photography provided a radically new picture-making process—a process based not on synthesis but on selection. The difference was a basic one. Paintings were made—constructed from a storehouse of traditional schemes and skills and attitudes—but photographs, as the man on the street put, were taken.”
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“... in the working class, the process of building a family, of making a living for it, of nurturing and maintaining the individuals in it “costs worlds of pain.””
—Lillian Breslow Rubin (b. 1924)