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Money and Banking — Economics STD 12 Humanities & Commerce — Question

Rajasthan BoardEnglish MediumSTD 12 Humanities & CommerceEconomicsMoney and Banking3 Marks
Question
Explain how do ‘open market operations’ by the central bank affect money creation by commercial banks.
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Answer

Open market operations refers to the buying and selling of securities by the Central Bank from and to the general public. Sale of securities by the Central Bank leads to flow of money out of commercial banks and into the Central bank. This reduces effective deposits with commercial banks and checks money creation reducing aggregate demand and investment.

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