Discuss the ways in which the Federal Reserve use open market operations and discount lending to influence the economy. Discuss what happens when the Bank of England conducts a restrictive open market operation.

            Open market operation is a market policy, which is also known as OMOs. The sale and purchase of the government securities in the open market operations such as bonds bills and notes which is aimed to increase the supply of the money in the market. The federal bank uses this monetary policy to support the economy and this policy is usually use by the Federal Reserve to implement the monetary policy. The Federal Reserve has to manage the financial position in the market therefore, to control the money supply and to control the rates that it used to attract the new lenders, the open market operations use as an effective monetary policy [5].

        Following, this the open market operation is indirectly linked with the interest rates and the selling and buying of the government securities also influence the interest rate when the operations are performed in the public financial exchange. The Central bank us this monetary policy to the economy by influencing the supply of money. It is because when the securities are sell by the central bank in the market, then the it influence the circulation of the money in negative way. On the other hand, for the expansion of the monetary policy, the securities are purchase it reflects the money supply increase. Following this, when the money supply is change in the market then it has direct impact on the rates, which are used by the banks to lend one another, which is based on the supply and demand rule.

        The open market monetary policy is usually use when the banks aimed to target the rate. In this practice, to ensure that the banks have necessary funds, they take overnight loans, which are used to meet the requirements of the reserve of the Federal Reserve System. The rate of the federal funds has great importance for the economic flow because fluctuation in the federal funds rate also influence the interest rate and at the same time it influence the economy. In this regards with the increase in the federal funds rates, the rates such as home loan, car loan, prime rate and other are also increase. Subsequently, the Federal Reserve us this monetary policy to acquire the target rates. In this regards, as it is mentioned above, the Federal holds the securities of the government and at the same time, it also holds the funds of the banks, financial institutions, companies and individuals as well [6].

        The open market is also used for the contractionary monetary policy and it is used when the government securities are sells into the open market and in the return of it the buyers takes money out from their banks accounts to pay for the securities due to which the funds amount in the banks account of the buyers decrease. In this situation banks, become in a position to lend less money. Following this when the money is available in limited amount then the demand of the lends increase that directly cause of increase in the interest rates on lending and at the same time, the federal funds rates increase as well.

        On the other hand, in terms of using it as an expansionary monetary policy the government securities are buy from the Federal reserves from the bond market in which the securities dealers are approached to buy securities. In the return of it, the money transfer to the accounts of the businesses, banks and individuals who opted to sell the securities. Following this, when deposits reach to the commercial banks the capacity of the banks to lend increases due to the large availability of the funds in the banks accounts. It allows the bank to lend more money therefore, it make the banks to attract new clients who lend the money therefore, the strategy is applied in which the interest rate reduce. The reducing interest rates create investment opportunities for the investors and they opt to lend more from the banks on low interest rates.

        Likewise, when the Bank of England conducts a restrictive open market approach then it means that it has large money to lend and it has low demand due to which it becomes expensive for the bank as bank offers discounts rate for the lenders to end money. Moreover, in this situation, the banks can also opt another option in which the bank deposits the treasury notes at the central bank. Following this, Federal Reserves opt to decrease the supply of the money by selling the treasury to the member banks and the following this to raise the rate of the funds the restrictive monetary policy is used. Overall, the open market policy is a key tool that enables the Federal reserves to control the money supply as well as to control the interest rates that effects the economic conditions and the position of the financial institutions [7].

References of of England conducts a restrictive open market operation.