Answer to Question #89292 in Macroeconomics for Teanibuti Biraatai

Question

Suppose you are "recommending" monetary policy. The economy is experiencing a sharp and prolonged inflationary trend, What change in open market operations would you recommend?

Answer 1

One of the ways to affect the money supply in an economy is through the prudent use of open market operations which refer to the sale and purchase of government securities and treasury bills by a central bank of a country. Open market operations are a major tool for curbing the high inflation levels.

The monetary policy measure for an economy undergoing a sharp and prolonged inflation, I would recommend the sale of government securities by the central bank as this will reduce the money supply in the economy. The reduced supply of money in the economy will cause a rise in rates of interest which in turn will bring down the investment demand and consumption demand. This will cause a fall in aggregate demand which and therefore, the general price level will also fall. This is how the sale of government securities will help reducing inflation.