2010 DSE

[NM]

Q) Open Market Operations decrease the supply of base money by:
a. Selling Government Bonds
b. Selling Gold
c. Reducing Foreign Currency Holdings
d. All of the above

The answer provided by Amit Sir is (d). But shouldn't it be (a) as gold and foreign currency don't constitute as a part of the open market operations.

[Dreyfus]

Monetary authority  ie central banks are sole reserver of gold nd currency of a nation.....so when it transacts gold and currency it effects nation's money supply....

[NM]

Hey Vaibhav.

But as far as I've read the trading of gold by CB isn't a part of Open Market Operations. I mean that is what is mentioned in Blanchard, that it is an "Open Market for Bonds".

[Homer Simpson]

yeah, doesnt the govt use bonds to do OMO?

[Dreyfus]

Actually central bank requires commercial banks to keep gold as a reserve requirement with central bank...now when this requirement fluctuates the central bank's reserves for gold fluctuates leading to fluctuation in money supply....

[Dreyfus]

Sry for my last post.....the central banks maintains gold reserves not required for commercial banks.... U can refer this link for the clarification http://en.wikipedia.org/wiki/Open_market_operation

[kangkan]

forex transactions affect Money supply....salvatore..so it d is the only possible optiuon

[Homer Simpson]

How is that related to OMO?

[kangkan]

good question tsuki...my idea was that all central bank interventions are open mkt interventions :(

[NM]

Even the wiki-link that Vaibhav referred to mentions that open market operations are related to government bonds.

[Dreyfus]

@NM ...plz go through once again.....as its written there some omos comprises of forex transactions through central bank's forex branch division....

[Arushi1]

Forex transactions are a part of OMO. Thats how countries with fixed exchange rates maintain their rates.