Question

Why does the Fed use open market operations to a greater extent than reserve requirements in its conduct of monetary policy?

Answer 1

Ans: Open market Operations refer to the buying and selling of governement securities by FED in the open market .

Reserve rquirements : It is a tool of mpnetary policy in which reserve requirements such as Cash reserve ratio, Statutory Liquidity ratio etc are altered to control money supply .

Open Market Operations(OMO'S) are advantageous over reserve rquirements because they are easy to handle unlike reserve requirements. Open market operations are directly done by FED and help in immediate infusion of money(through Buying OMO'S) and absorption of money(Through selling OMO'S) . However , altering reserve requirements has lags in reaching the public as FED though alters them but it has to depend on Commericial banks to extend the benefit to general public . Thus, reserve requirements do not give direct power to FED to control the money supply .

Hence . OMO'S are highly preferred over other tools as the direct control lies with the FED and the effects are visible on an immediate basis.