Discuss the ways in which the Federal Reserve use open market operations and discount lending to influence the economy.

        Federal Reserve us the open market operations through selling and buying the government securities, which affects the total money supply in the circulation, this is called open market operations. The government securities names are such as Treasury bills, government bonds and notes. When Federal Reserve wants to increase the money supply into the economy, they keep buying the securities and when they want to reduce the money supply, they keep selling government securities to the people (Dorfman, 2018). The reasons they want to control the money supply into the economy because they have objectives such as reduce the inflation rate, consumer price index or increase the money supply to grow the economy.

        The Federal Reserve Bank holds the discount lending operations as they offer the loan to the commercial banks at specific interest rates. Commercial banks obtain the loan from federal bank in order to meet their financial requirements (Michael, 2015). The discounting rates are higher when they want commercial banks to loan it forward at higher interest rates. This method is used for controlling and limiting the money supply because inflation is increasing at that time and controlling the moneys supply would help the economy to reduce its aggregated demand for the products, which leads to reduction in the inflation rate.

        As far as Bank of England concerns restrictive open market operations, restrictive open market operation is defined as when monetary or money supply needs to be tightly controlled into the economy, which leads to slow down the economic growth. Bank of England through its policies restricts the liquidity into the banking channel, which affects the economy. When Bank of England conducts the restrictive open market operations, it is held with the objective to reduce down the inflation rate. Its sucks the money circulation from the economy and people aggregated demand reduces comparing to the supply which further leads to drop in inflation rate up to the point where it is healthy (Mayes, 2013).

        There is also other kind of impact after conducting the restrictive open market operations, it would also negatively impact on investment as cost of capital would be increased, less capital is acquired for investment which leads to low economic activities and less employment production. This is the negative impact of restrictive open market operations through Bank of England, but it is done with the purpose of controlling down the excessive money supply and reduces down the inflation rate. In the restrictive open market operations, investment goes down as investors finds the cost of capital is higher and they do not want to pay higher interest expenses on the investment especially at the time when money is also being sucked from the economy (Dombret, 2014).

        The economic growth slow down after the restrictive operations because there is less money circulation into the economy which can be capitalized or invested to produce more and more. Restrictive policy reduces the production rate, which slows down the economy growth, and less employment is produced. There are several negative consequences of this policy and it is not good when economy is already suffering from the depression or higher unemployment. It is usually conducted when economy has too much money in the circulation and they are experiencing inflation in the economy (Harvey, 2018). Then restrictive operations are conducted to suck down the money supply so that aggregated demand and supply can match each other.

        It is very important for the Bank of England and other central banks to keep the strict regulations on the commercial banks which takes it very easy otherwise and exploit the own position, keep lending the money into the unproductive sectors. It increases the money circulation too much and in the result there is too much inflation and economy is mismanaged. It is very challenging for the economy and people when they face the restrictive open market operations policy coming from the Bank of England as new businesses are unable to survive which needs short-term financial liquidity from commercial banks to meet the expenses (Gibbs, 2014). Increase in interest rates also increases the expenditures, which is quite challenging for new businesses and start-ups.

        Tight monetary policy is most of the time implemented after the time when central banks had weak regulations on commercial banks and they resulted as throw the huge money supply into the economy. A well monetary policy is the one where aggregated demand and aggregated supply is being matched with each other. Therefore, Bank of England conducts restrictive open market operations most of the time leading to the depressed economy and slow economic growth rate, which increases the unemployment and discourages the new investment (Neave, 2012). This is often happens because of weak regulation policies from the central bank side to the commercial banks. Bank of England or other Central Banks are responsible for keeping the close and strict check on commercial banks as they cannot exploit the economy for own profits.

References of influence the economy