In 2 or 3 sentences, describe how open-market operations change the money supply.

Open-market operations change the money supply by:

1.       The local bank decreases its credit form the larger bank and increases their supply of money.

2.       Can influence short-term interest to the bank.

Purchase of securities increases money supply while sale of securities reduces it.

Explanation:

Open market operations refer to the purchase and sale of securities by the central bank. It is a tool used by the central bank to influence money supply.  

When the central bank purchases securities from the commercial banks, it pays them back. This increases reserves with the bank. Bank lends this money to consumers and investors. In this way, the money supply increases.  

When the central banks sell securities to the commercial banks, it reduces reserves with the banks. As a result, lending also gets reduced. This further causes the money supply to decrease.

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